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Energy in a Trump Administration

November 9, 2016
Jim Marchiori
Executive Director, Global Energy Management (GEM) Program
University of Colorado Denver Business School

 

j_marchioriWell, the election is finally over and, like any morning after, now we have to pick up the pieces and figure out what to do next.

I’d like to take this time outline what I think the future of the energy industry looks like for the next few years in the administration of President-Elect Trump, and the effect this might have on GEM students and alumni. It’s too early and the facts too scarce for detailed analysis, so this represents my best interpretation of what I have seen so far.

Energy Fundamentals
Before I get to Mr. Trump I want to write just a little bit about my view of the fundamentals – those things that probably don’t change much no matter who occupies 1600 Pennsylvania Avenue. Right now I am looking at four major drivers of energy that I think are more or less incontrovertible:

  1. Overall demand for energy will continue to grow worldwide. Even as efficiency improvements level off demand in North America, Western Europe, and the more advanced countries of Asia and Oceania, overall economic growth and alleviation of energy poverty in Africa and other parts of Asia mean that we’ll still need a lot more energy around the world in 2030 than we need in 2016. There may be occasional dips as world economic activity and growth fluctuates, but the overall trend will be upward for the next generation.
  2. We still have a surplus of oil and natural gas, resulting in downward pressure on prices. I’m not looking for a price crash – in fact, I still expect a modest rise through 2017 and 2018. The key word here, though, is modest – there’s just too much available and potential supply for more than that. A side effect of the gas price is continued pressure on coal. As much as some would like to have us believe that coal is being regulated out of existence, industry pros know that this is not true; coal is certainly fading, but this is much more due to cheap natural gas than to regulation, and nothing is likely to change that.
  3. Renewables will continue to grow market share as their technology and economics improve, and as people around the world demand them more. However, no matter how much wishful thinking there is, renewables’ growth will still be limited by technology, cost, and existing infrastructure for the next several years. The world will add a lot of renewables and the use of fossil fuels as a proportion of the global energy mix will decline, but the overall growth of energy demand means that we’re still likely to use more barrels of oil and cubic feet of gas in 2030 than we do now.
  4. There will be continued international and domestic pressure on energy due to climate concerns. I do not believe that this will have a major impact on either the amount of energy that we must produce or on the mix of primary energy sources that we use to produce it. I do believe, though, that there will be a need for continuous improvement across the industry: for fossil fuels we will have to get a lot better at managing carbon whether in the form of methane or CO2; for nuclear, we must find a way to alleviate public fear; for renewables we will have to improve supply chains, technology, and cost; and for every form and use of energy, we must continue to improve efficiency.

All of this represents an opportunity for energy leaders and specialists across the board and my long-term view of the future of our industry – and the opportunities within it – is a rosy one. We probably still have a few months of pain ahead of us, but I think the worst is past, and as an industry, we will emerge – maybe looking a little different – but still strong and getting stronger. Energy is too important to the world for any other outcome.

So that’s the fundamental context, but how will they be affected under President Trump? Mr. Trump has been a little scarce on details, but if we read what he has said we can make some educated guesses. It appears to me that the philosophical root of his policy is to make energy decisions based on pure market economics and price with some national security influence, but absent consideration of economic externalities like environmental or social impact (he denies the role of carbon in climate change). At this point, it looks like the Trump administration will have three major areas of policy emphasis with regard to energy: (1) US energy independence; (2) use of domestic fossil fuels and nuclear; and (3) rollback of federal regulations.

US Energy Independence
The President-Elect has expressed this concept in a couple of different ways. On the one hand, he has stated an intention to make the US completely energy-independent. He has also given a little more nuanced view that we should be independent of the need to import energy from OPEC or any nations hostile to US interests. My view is that the former is both impossible and undesirable, but the latter is fairly easy to achieve – in many ways we’re there already, and I don’t see a lot of change here from the status quo. A possible exception would be if a drive toward energy independence leads to actual restrictions on oil imports; I can’t predict the probability of this one way or the other, but the effect would be a substantial increase in both oil price and domestic production with a much smaller effect on natural gas.

Primary Energy Sources
It’s abundantly clear that Mr. Trump is no fan of wind or solar. He has many statements on record opposing both, mainly for economic and aesthetic reasons (he says they have long payback periods and they’re ugly). He also applies the payback argument to green buildings. He is a strong believer in shale, nuclear, and coal, and has vowed to expand oil and gas production along with a resurgent coal industry. He would open up more federal lands and offshore areas for oil and gas production.

Regulatory Rollback
We actually have a few specifics here. The President-Elect has said that he will “cancel” the Paris Accords (it’s unclear exactly what that means or whether he can actually do it), and eliminate the Climate Action Plan, the Clean Power Plan, and the Waters of the US rule. In general, he plans to eliminate all “unnecessary” regulations. I would not expect a carbon price under the Trump administration.

Analysis
If we simply take the President-Elect’s statements at face value, it’s pretty clear that oil, gas, and coal will provide the major areas of opportunity over the next four years. Absent either subsidies or regulatory drivers, renewables and energy efficiency are likely to suffer, though I doubt that they’ll go away entirely. The power & public utilities sector probably proceeds more or less as usual, except with a reduced pace toward adoption of renewables.
However, both market and non-market forces still apply, which is where the fundamentals that I discussed earlier come into play. Mr. Trump has not addressed how regulatory reform will expand oil and gas production at $50 per barrel, or how expanded production will not continue to erode prices. He also ignores the fact that cheap natural gas, not federal regulation, is by far the most potent “killer” of coal. It’s very hard to see how to support both more natural gas and more coal production at the same time, and I think coal will continue to suffer unless he finds a way to subsidize exports; even that might prove ineffective if there is a general decline in trade or restrictions on oil imports.

As far as oil and gas prices are concerned, I see forces in both directions: downward pressure will come from increased supply as more production is encouraged, and potentially from reduced global demand if protectionist policies negatively impact global growth (one of the “dips” I mentioned in the fundamentals). Upward pressure will come from geopolitical uncertainty regarding the Middle East and China, from deterioration in the value of the dollar that we are already starting to see this morning and which may well continue as a matter of trade policy, and possibly from a restriction on imports. On the whole, I would look for more downward than upward pressure, at least in the short term, but in the longer term, I would expect a return to fundamentals, except in the (hopefully) unlikely event of import/export restrictions or a major trade war.

On the non-market side, there will continue to be pressure that favors renewables; the international community, environmentalists and ordinary citizens will not stop demanding either climate action or renewable energy. Jurisdictions and companies that have developed strong economic interests in wind and solar will press Congress for continuation of policies that benefit them, and their respective Senators and Representatives will work to protect their constituencies.

So in the end, I think we’ll still see headwinds for renewables, energy efficiency, and green building, and tailwinds for oil, gas, coal, and nuclear; however, I think these will be moderated by the market and we’ll get more “business-as-usual” than we might expect at first glance. To whatever extent Mr. Trump gets his way, the cheapest possible energy will be the norm.

Career Implications
If I were early in my energy career I would lean toward the commercial side of oil and gas, midstream, downstream gas (distribution, retail, and end use), and public utilities. Many people have left the oil and gas industry, whether by choice or not, and I am hearing a lot of indications of a talent shortage in 2018, even with a small increase in price. I would lean – but not run – away from domestic renewables, efficiency or green building consulting, and environmental roles. I don’t think these will go away, and if renewables were my passion I would not give up, but I do think that growth will be slower and domestic opportunities tougher; however, if I had my eye on international I would expect continued robust green opportunity. I would also keep in mind that to a significant degree much of President-Elect Trump’s policies and goals buck the long-term fundamentals and so are probably not viable forever; even if I spent 100% of my time in traditional energy areas for the next few years, I would respect the fundamentals, continue to build my pan-energy chops, and preserve my options to work anywhere in the energy industry in the future  – pretty much what you’re doing at GEM already..

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