A new era for US energy policy?

Published at 16:06 27 Feb 2017 by

During his election campaign, President Trump promised a fundamental overhaul of the way America is run. In the energy sector, this could reverse the trend of recent decades towards tightening environmental regulations.

Trump has started his term with a flurry of actions that are being cheered by US oil, gas and coal producers, including his backing for two controversial oil pipelines and appointing people to key administration roles who are known to support the fossil fuel industry.

Meanwhile, Congress has used its power to undo rules passed by the Obama administration in its last months, which would have increased compliance costs for producers by $385-466 million per year in the future. Trump has also ordered a temporary halt to the development of new regulations, which will almost certainly lead to the demise of proposals to further tighten energy regulation in the future, such as potential EPA rules covering contamination of groundwater by fracking. But quick wins will soon be replaced by the hard grind of unpicking established laws.

The president will discover that much energy regulation is written at the state level, particularly for the upstream. He will also face checks and balances from other branches of government and fierce lobbying in Washington by competing interest groups. All of this will bog down his plans.

We believe Trump will find it extremely difficult to overturn existing rules in order to unleash the huge growth in production and lower energy costs he promised. He may end up relying on the courts to strike down regulations. A key first test will be over the EPA’s Clean Power Plan (CPP), and while striking down the CPP is positive for coal, this is not the case for gas. As it stands, the CPP represents a big incentive for states with coal-dominated power sectors to use more gas.

The administration is likely to announce proposals to reform the tax code and there has been much discussion of whether these will include a border adjustment tax (BAT). That would have implications for both oil and gas tradeflows and would be broadly beneficial to US producers but seems to lack support in the Senate. Also, NAFTA trade partners would likely retaliate to any anti-trade measures with their own policies. With US gas exports to Mexico an important source of incremental demand, a deterioration in trade relations does the gas market few favours.  

Trump’s efforts to shake up the federal government, in so far as they are successful, could prove negative on balance for the gas industry. Some will help lower production costs, but that may be more important for coal, which is the main competitor fuel to natural gas. Others might actually dampen gas demand, both at home and in Mexico. However, legislative and political constraints mean that a muted impact is more likely than a quiet (or indeed noisy) revolution.

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