Why The U.S. Election Results May Have Less Effect Than You Think
By Martin Tillier - Nov 07, 2014, 11:01 AM CST
There is an enormous sense of relief in the U.S. at the moment. Not necessarily because the Republican Party won the mid-term elections, but just because they are over and the barrage of vacuous and negative advertising is finally over. Still, as the President memorably once said, elections have consequences. Most energy investors probably see the result as a good one for their portfolio, regardless of their political leanings, and, so far, that looks to be the case. The energy sector ETF, XLE, rose over 1 percent on the news and is holding onto gains. Some Republicans are already making noises about a “more relaxed” policy towards oil and other fossil fuels and many are predicting that that will be one of the first areas the new Congress addresses. Investors, however, should not get carried away.
It is likely that Republicans in both the House and the now Republican controlled Senate will introduce bills aimed at approving the Keystone XL and other pipeline projects, and at expanding drilling permission in the U.S., including on Federal land. That is all well and good, but, apart from in certain sectors of the oil and gas industry, the effect is likely to be limited.
First, any such legislation will have to get past the President’s veto. It is possible that Barak Obama will wish to soften the image of intransigence that many feel will be his legacy and sign such legislation, but is equally possible that, with nothing to lose personally, he will…
There is an enormous sense of relief in the U.S. at the moment. Not necessarily because the Republican Party won the mid-term elections, but just because they are over and the barrage of vacuous and negative advertising is finally over. Still, as the President memorably once said, elections have consequences. Most energy investors probably see the result as a good one for their portfolio, regardless of their political leanings, and, so far, that looks to be the case. The energy sector ETF, XLE, rose over 1 percent on the news and is holding onto gains. Some Republicans are already making noises about a “more relaxed” policy towards oil and other fossil fuels and many are predicting that that will be one of the first areas the new Congress addresses. Investors, however, should not get carried away.
It is likely that Republicans in both the House and the now Republican controlled Senate will introduce bills aimed at approving the Keystone XL and other pipeline projects, and at expanding drilling permission in the U.S., including on Federal land. That is all well and good, but, apart from in certain sectors of the oil and gas industry, the effect is likely to be limited.
First, any such legislation will have to get past the President’s veto. It is possible that Barak Obama will wish to soften the image of intransigence that many feel will be his legacy and sign such legislation, but is equally possible that, with nothing to lose personally, he will look to make himself a hero of the conservation movement by wielding the big red pen on any expansion of the fossil fuel industry.
Even if the President does prioritize public image over party image the actual effects of any such legislation on most U.S. oil and gas companies will be limited. Keystone is designed to transport Canadian oil through the U.S. for export, so is of little if any benefit to American oil companies. Expanding access to oil reserves may well be a boon to those companies in the long term, but it won’t produce an immediate U.S. energy boom. We have already had one of those, and some of the effects have been evident over the last few months.
Of course, increased supply isn’t the only reason oil prices have fallen so dramatically. If anything, the corresponding drops in other commodity prices, from gold and silver to wheat and corn, would indicate that Dollar strength is one of the main reasons for oil’s decline, but increasing oil and gas supply certainly doesn’t help in those circumstances. If a Republican controlled Congress does mange to enact fossil fuel friendly laws is it likely that oil companies will rush to make use of them with oil at or below $80 per barrel? The logical answer would be no, or at least not until worries about slowing economic growth that have also contributed to oil’s drop dissipate somewhat.
Exxon Mobil (XOM), Chevron (CVX) et al have very little incentive to rapidly expand production in a falling price environment, even if the government gives them permission to do so and also offer encouragement in the form of a less stringent regulatory environment. There may be some opportunities, but the U.S. is only part of their business, so the overall effect on the large multi-nationals is unlikely to be substantial. Smaller E&P companies are also unlikely to take on more debt to exploit these opportunities in the current environment, given that many are facing the prospect of losing money on some existing wells at current prices.
Still, if legislation does get through, there will be companies that benefit from any expansion of the domestic fossil fuel business. Coal companies could see some relief. Oil and gas companies focused downstream, oilfield service providers, and pipeline and other infrastructure building companies would all see at least the prospect of more business in the future and have less exposure to oil prices. Over time there could be opportunities in all of those areas, but, for now, the problems that have caused energy stocks to drop have not receded because there are more Republicans in the U.S. Congress.