Lauerman: Biden Presidency Series Part 3 – Impact On Energy Markets

The first part of this four-part series explored Joe Biden’s plan to combat global climate change, while the second part identified his probable policies for the U.S. oil and gas industry upon becoming president.

In Part Three, the impacts of these potential policies on global energy consumption, energy mix and U.S. oil and gas production are quantified under two scenarios — Medium Emissions and Low Emissions—  through 2035. The Reference Case from the U.S. Energy Information Administration’s (EIA) International Energy Outlook 2019 is used as the basis for comparison.

Since the EIA’s business-as-usual case was developed before the COVID-19 pandemic devastated the global economy and the superpower rivalry between China and the U.S. morphed into a New Cold War, these additional key drivers are also considered for the two scenarios.

Key drivers

The primary impact of rising trade blocs under a New Cold War and economic and financial fallout from the COVID-19 crisis is to retard global energy consumption by slowing the rate of global economic growth. During the original Cold War from 1947 to 1991 the global economy grew an average of about three per cent per year, compared to 3.7 per cent annually since 2001, when China joined the World Trade Organization (WTO) and economic globalization took off in earnest.

At the same time, governments around the world have been blowing through their fiscal and monetary firepower in recent months to avoid COVID-induced financial and economic collapse. And this is after a decade of loose fiscal and monetary policies by the major powers to bolster economic growth since the 2007-09 Global Financial Crisis.

For example, the Congressional Budget Office (CBO) is forecasting the U.S. federal deficit to be US$3.7 trillion in fiscal year 2020 based on current spending plans, or 17.9 per cent of GDP, the largest deficit since 1945 —  the final year of World War II. In addition, assuming a deficit of US$2.1 trillion in fiscal year 2021, federal debt will be 108 per cent of GDP by the end of the period based on CBO calculations, the highest in U.S. history.

In contrast, Biden’s Clean Energy Revolution should slow growth in global energy consumption indirectly, by boosting improvements in energy intensity —  the amount of energy required to create a unit of economic output. It will also increase the share of renewables in the global energy mix relative to fossil fuels. If his policies are sustained after his presidency and supercharge the net-zero emissions by 2050 movement, improvements in energy intensity and shifts in fuel mix should be substantial even in the next 15 years.

Two scenarios

As should be expected, the three key drivers are more muted under the Medium Emissions scenario than the Low Emissions one. Biden wins the presidency in November in the Medium Emissions scenario, but the Democratic Party fails to win a majority in the U.S. Senate. This leads to legislative gridlock in Washington, albeit not as serious as during most of President Barack Obama’s two terms in office.

Despite Republicans watering down Biden’s Clean Energy Revolution legislation —  and proposed policies for the U.S. oil and gas industry as well —  President Biden is able to revive domestic and global efforts to combat climate change. On his first day in office, on 20 January 2021, he has the U.S. re-enter the Paris Climate Accord. Biden also convenes a global climate conference within his first 100 days in office, as promised on the election trail. The Democrats lose the 2024 presidential election, but the new Republican president is relatively committed to fighting climate change as well, as are the majority of his party’s supporters.

Under the Low Emissions scenario, Biden is a two-term president and the Democratic Party controls both chambers of U.S. Congress the entire time — President Donald Trump’s divisive single term in office does massive and long lasting damage to the Republicans. This allows President Biden and his Democratic colleagues to push through most of his legislative agenda for the Clean Energy Revolution and U.S. oil and gas industry. All the major powers follow America’s lead and substantially increase their Paris commitments to reduce greenhouse gas (GHG) emissions, with a goal of achieving zero-emissions by 2050.

It should be noted that China agrees primarily for domestic reasons, with the New Cold War relatively hot under the Low Emissions scenario. The Chinese economy, which benefited most from free trade in recent decades, slows relatively more as the world breaks again into trading blocs. Caught in the so-called Middle Income Trap, the Chinese Communist Party is forced to swap the basis of its legitimacy from rapidly rising economic growth and standards of living to quality of life —  Read: breathable air in its cities.

COVID-19 hits the global economy hard in the short term under both scenarios, with the impact lingering through 2035 under the Low Emissions scenario.

Global energy market

Global economic growth is strong under the EIA Reference Case, moderate in the Medium Emissions scenario and weak under the Low Emissions one through 2035 (see Table 1). The primary reason for the difference in economic growth between the EIA’s business-as-usual case and Medium Emissions is the assumed impact of the COVID-19 pandemic — with average economic growth actually higher over the 2020-35 period for the latter because of the expected rebound in economic activity next year — and between the Medium Emissions and Low Emissions scenarios the severity of the New Cold War on trading patterns.

Improvements in global energy intensity average an impressive 2.5 per cent per year through 2035 under Low Emissions, powered higher by President Biden’s successful domestic and global climate change policies. This is 0.2 percentage points more than Medium Emissions, which in turn is a 0.2-point improvement over the EIA Reference Case.

As a result, growth in global energy consumption averages 1.1 per cent per year through 2035 in the EIA Reference case, 0.5 per year under Medium Emissions, but is flat in the Low Emissions scenario.

The shift in global energy mix is even more extreme over the projection period, with coal and oil especially hard hit under the Medium Emissions and Low Emissions scenarios, and renewables the big winner (see Table 2). In fact, coal consumption declines dramatically in both scenarios, while oil consumption declines somewhat or more (see Table 3).

Natural gas maintains a relatively steady share of the global energy mix under both scenarios, but growth in global gas consumption is minimal through 2035 in Low Emissions. Gas consumption benefits from a large increase in blue hydrogen production —  produced through a combination of steam methane reforming and carbon capture utilization and storage (CCUS) —  in this scenario through 2035, counterbalanced by declines in space heating and industrial demand.

Global GHG emissions decline a substantial 18 per cent between 2018 and 2035 under the Low Emissions scenario, a solid start in achieving the goal of net-zero emissions by 2050, compared to a seven per cent decline for Medium Emissions, and an increase of six per cent under the EIA Reference Case.

U.S. oil and gas output

U.S. oil and gas production is projected to be significantly lower in 2035 under the Medium Emissions and Low Emissions scenarios compared to the EIA Reference Case (see Table 4). This is not because of probable Biden administration policies for the industry, which on the whole appear pragmatic (see Biden Presidency Series Part 2 – Policies For U.S. Oil And Gas Industry), but the negative impact of lower levels of global oil and gas consumption on prices for those two commodities.

The business-as-usual case assumes a West Texas Intermediate (WTI) equivalent price of around US$75/bbl in 2035, trending higher from US$65 in 2018. The Henry Hub (HH) price for natural gas is assumed to increase from US$3.15/mmBtu in 2018 to about US$3.50 in 2035. In contrast, WTI is assumed to average US$50 over the projection period under Medium Emissions, and HH gas to average US$2.75. Average prices for the Low Emissions scenario are US$40/bbl and US$2.25/mmBtu, respectively.

U.S. oil production increases by almost a quarter to 20.4 million bbls/d between 2018 and 2035 under the EIA Reference Case, compared to a one per cent increase for Medium Emissions and a 13 per cent decline under Low Emissions. In contrast, U.S. natural gas production increases over the projection period for all three scenarios, by over a third to 39.6 trillion cubic feet under the EIA business-as-usual case, 13 per cent in Medium Emissions and one per cent under the Low Emissions scenario.

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