Biden’s four-point energy plan:
On Wednesday, June 22, President Biden outlined his “four-point plan” to bring down U.S. gasoline prices, which recently topped a national average of $5 a gallon. Diesel prices approached $6 a gallon. The the package includes:
- Ask Congress to suspend the gasoline tax ($0.18/gallon for gasoline and $0.24/gallon for diesel) for 90 days.
- Ask states to suspend their gasoline taxes.
- Ask oil companies to use profits to increase refining capacity.
- Asking gas station owners to pass on savings from lower oil prices to consumers.
The reasoning behind the president’s speech is no mystery. High gas prices are a political liability and may hurt the Democrat’s chances in the upcoming November election. However, none of these proposals fall directly under the President’s jurisdiction, three of them fall outside the direct jurisdiction of the federal government, and the impact of implementing one of them seems limited, and I wonder how serious they are. I will address each element below.
1. Congress can suspend the gasoline tax. However, unless Republicans support the measure (and they might do so for political reasons), it would require nearly unanimous votes from House Democrats and all Democratic senators. It is not clear that the far left and environmentally conscious members of the party would support such a reduction. Additionally, it would eliminate taxpayer dollars used to maintain the nation’s interstate highway system.
2. States can (and some like New York have done) temporarily suspend their gasoline taxes. This measure is entirely up to individual states. I don’t see how to ask states to do something that some of them are already part of a master plan from the nation’s chief executive.
The irony, of course, is that lowering taxes could help offset any demand destruction and therefore potentially lead to higher prices.
3. Refining capacity has been declining in this country for decades. No new gasoline refineries have been built since 1977. Several, including the huge refinery in Philadelphia, closed during Covid due to lack of profitability. Additionally, integrated oil companies like Shell (SHEL) have exited the refining business because inputs and outputs are highly cyclical, and many in the ESG community consider it a “ dirty “. Authorizing the construction of a new refinery would probably be incredibly difficult, if not impossible, to obtain, and I think few companies would use today’s high refining margins in their profitability projections for a new project.
4. This last point of the President is perhaps the most futile. The big oil companies don’t own a lot of gas stations. Most are owned by companies that have nothing to do with producing or refining oil. They buy their gasoline on the wholesale market, which is international. A buyer in France can purchase the same available gasoline from a gas station owner in Alabama, provided both have access to transportation for the product. Asking gas station companies to pass on oil price reductions is like asking the corner grocery market to pass on lower corn prices when they sell corn flakes.
How serious is the intention?
There have simply been too many cases and actions that run counter to lower energy prices. In a speech in May in Tokyo, the president said: “When it comes to gasoline prices, we are going through an incredible transition that is happening and, God willing, when it is over, we will be stronger. and the world to be stronger and less dependent on fossil fuels.” Also in May, when asked by Wyoming Senator John Barrasso, “Do you believe gas prices are too high? The Secretary of the Interior Deb Haaland has repeatedly refused to say.
These are not the words of people who seem overly concerned about gas prices. Rather, it indicates people who believe that high gas prices are something people will just have to absorb when transitioning to electric vehicles.
It’s not just words. On his first day in office, President Biden revoked the permit for Keystone XL, which was to bring oil from Canada to this country. He also halted all new leasing of federal lands for oil and gas exploration during his first week as president. Equitrans’ Mountain Valley Pipeline (ETRN), a 300 billion-mile interstate pipeline that could transport more gas produced by companies such as EQT (EQT) from Marcellus to Virginia, is still awaiting a permit to cross three miles of federal forest. It’s hard to criticize companies for not producing more oil when things related to oil and gas production under direct federal control were first in line on the chopping block when the president took office or stay in hell. bureaucracy that the president could probably end with a stroke. of his pen.
It all depends on supply and demand:
I do not intend this message to be political, and I am in fact not putting much of today’s oil and gas or gasoline prices at Biden’s feet. The industry basically fired up the money from around 2009 to 2016. Poor returns and shareholder revolts led the industry to cut investment in new production and refining capacity for several years. Commodities are all priced at the margin. Sufficient marginal capacity has exited the system during Covid and sufficient potential capacity remains locked in due to the lack of pipeline infrastructure for the balance to shift from energy consumers to producers. That said, I’m not letting the president off the hook.
Biden has spoken openly about moving away from fossil fuels since he was a candidate. He could reverse his decision on Keystone XL, get his Mountain Valley permits, encourage the construction of interstate pipelines (perhaps through federal guarantees), and end the export of refined products. The fact that he hasn’t done any of this makes me wonder if the admin suddenly sees the oil and gas industry as a potential resource or if the high prices are just short-term hurdles to overcome before an election. With this in mind, the SPR version, which is finished, is a clear short-term solution. This could temporarily weigh on oil prices, but could probably only fill the production hole that OPEC has been unable to fill. In addition, the release of the SPR comes at the cost of a massive drop in our reserves and removes a club that we formally had against OPEC.
Meanwhile, Russia continues to cut natural gas supplies to Europe, driving prices back near highs there. Sanctions on Russian oil and refined products are also driving a surge in gasoline, diesel and jet fuel in Europe, helping to push refined products higher worldwide.
Impact for energy equity investments:
Given this ultimate futility of increasing energy production and increasing refining capacity, my long-term view of energy, which I married for the first time last summer and followed several times, did not wither. On the contrary, it has grown stronger. My favorite pieces from them and the region are:
- European natural gas: Equinor (EQNR) and Vermilion Energy (VET). I have been EQNR for a long time throughout the year and recently updated my thoughts after meeting with management. I met Vermilion management at the same conference. Both companies are highly exposed to European natural gas prices and generate immense cash at these prices.
- American natural gas: EQT, Chesapeake (CHK), Crestwood (CEQP) and Enterprise Products (EPD). EQT and CHK generate huge cash flows and aggressively return that cash to shareholders given rock solid balance sheets. CEQP and EPD should benefit from significant volumes and modest new drilling. As I wrote on EPDit benefits from the increase in NGL exports. My recent article on the CEQP covered the accretive repositioning of the portfolio.
- Carbon sequestration and renewable energies: California Resources (CRC) and Darling Ingredients (DAR). California Resources is a unique play on a heavy Californian energy footprint and, As I wrote, a cheap if not free option on carbon sequestration, which could represent a multi-billion dollar opportunity. High diesel prices benefit Darling Ingredients via its stake in Diamond Green Renewable Diesel Refinery while the proliferation of renewable diesel plants helps DAR’s core business.
Risks for energy investments:
As we just saw with the recent decline in energy stocks, the sector is both volatile and can be tied to the price of WTI oil, regardless of the ultimate impact of that price on any company’s bottom line. The good news is that many of the companies above ultimately have little exposure to the overall commodity price through hedging or simply the nature of their business (particularly CEQP and EPD midstream players). For those who can absorb the volatility, these sell-offs present excellent entry points.
Of course, there is also a risk that a new half-baked idea will come out of DC against energy, such as windfall taxes. The UK has already applied an exceptional tax on energy companies. I don’t believe a tax will increase production or lower prices. On the contrary, it could discourage increased exploration spending as profits will be penalized.
Just as most previous actions by the current administration have not had a major impact on commodity prices, I suspect the four-point plan will be equally toothless. If you see a drop in energy prices, I would expect it to be a result of simple supply and demand rather than anything this admin has proposed or will adopt.