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How Prez Biden Could Help Some Oil Companies


After the Reagan presidency, some observers drolly noted that Republicans seemed to be worse for the oil industry than Democrats, at least as regarded oil prices.

This was more coincidence than deliberate policy, except inasmuch as Republicans favor investment in oil production, which usually translates into lower prices.

U.S. oil price controls in the 1970s (begun under Nixon, ended under Reagan) elevated domestic consumption, reduced domestic production, and thus meant higher oil imports and more market power for oil exporting nations. (The price impact of the Iranian Revolution overwhelmed that effect, however.)

Could something similar happen under a President Biden?

Admittedly, the energy policies of a future Biden Administration are not yet clear: for one thing, the Democratic platform hasn’t been finalized and for another, announced policies are often honored more in the breach. Remember George W. Bush’s commitment to send a crewed mission to Mars? With all due respect to Elon Musk, this remains an aspiration. I hope to live long enough to see it happen, but I’m not signing time-share leases for the Red Planet.

The point here is that the current energy policy proposals from the Biden presidential campaign could have some perverse effects, benefiting some in the oil industry at the expense of others (and consumers). Nearly every action proposed tends to reduce oil and gas production in the U.S. and potentially raise prices. Banning new investment in public lands, especially offshore, restricting the flaring of methane, and likely making pipeline construction more difficult would tend mean less production and higher prices.

As my research last year showed, a ban on hydraulic fracturing of shale would lead to a serious reduction in shale oil and gas supply, given the high decline rates shale wells experience, possibly meaning a loss of 5 mb/d of oil production by the end of 2022 and 50 bcf/d of gas production. The impact on the U.S. economy would be so severe that it seems a complete fracking ban would never be implemented, despite some politicians stated policies. Recall that any number of Democratic politicians have supported regulated fracking, including former California Governor Jerry Brown and former Colorado Governor (and current Senate candidate) John Hickenlooper.

A more likely, but more difficult to quantify, policy such as a ban on flaring would raise costs for shale oil producers, possibly increase gas supply enough to have a marginal impact on gas prices, but reduce upstream investment and oil supply accordingly. (Max Pyzuir of EPRINC has quantified the impact of lower shale oil drilling on associated gas production.)

Similarly, pipeline constraints might not translate directly into reduced supply but would mean higher transportation costs and lower wellhead prices, thus cutting upstream investment and, later, supply.

Higher oil and gas prices combined with higher upstream costs would have a perverse effect of rewarding those with existing production while discouraging companies from increasing investment. Smaller players who were hoping to produce their way out of debt will have an even tougher time of things, but the oilfield service sector will be hit hard as companies redeploy capital elsewhere. So, the winners would be the companies with deep pockets and existing production, mainly the large oil companies, and the losers would be the Mom and Pop shale producers, which doesn’t seem to be the desired outcome for a Biden Presidency. Skilled workers would also be hit, as demand for crews declined, presumably even more distasteful to a Biden Administration. 

The macroeconomic consequences could be significant as well. With oil prices returning to $60 or higher, and natural gas prices probably rising above $3/Mcf, consumers would be facing potentially renewed inflation, especially if the government and the Fed are pursuing economic stimuli policies. Which also sounds reminiscent of the Carter Administration. Combined with higher consumer expenditures on energy, and a larger U.S. import bill for oil, would threaten renewed ‘stagflation,’ a term that hasn’t been heard much in four decades but whose return is hardly impossible.

(The title of this paper is a paraphrase of colleague Kemm Farney’s study years ago on regulation of utility emissions, which allowed greater leeway for existing facilities to continue emitting or, as he put it, “Smoke ‘em if you got ‘em” — possibly the best ever title for a research paper.)

EPRINCMax Pyziur Publishes “There Will Be Gas” – EPRINC

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