While we won’t know which political party will have a majority in the Senate until January 2021, the implications of what a Biden administration could mean for the energy and resource industries are already reverberating across the country, revealing a deep divide on energy and climate issues.
In the absence of a blue wave, in which the Democratic Party has a majority in both the House and the Senate as well as control of the White House, the Biden administration will likely find it challenging to pursue decarbonization policies at a federal level. That said, the U.S. president can exercise executive powers and direct federal agencies to reinstate environmental regulations that had been eliminated over the past four years, and support ongoing efforts initiated at the state level and by the private sector.
From a resource and climate-change perspective, there are two key areas that we believe will be highly relevant to the markets:
1 The United States likely to rejoin the Paris Agreement
Although the United States officially withdrew from the Paris Agreement on November 4, 2020, the country could rejoin the pact as early as the first quarter of next year—a decision that doesn’t require Senate ratification. However, any attempt to legislate carbon pricing policies will most likely stall in a split Senate, as was the case when the Obama administration introduced the Waxman-Markey bill in 2010.
In our view, to be effective in reducing carbon emissions, ambitious targets are needed for the power, transport, and manufacturing sectors, backed by billions of dollars in government investment. While such proposals—in their current form—are unlikely to be passed by the Senate, the Biden administration could turn to executive powers to introduce new regulatory measures. And this is without taking into consideration any initiatives occurring at the state level.
2 The Biden energy plan is unlikely to pass in its proposed form
The president-elect’s US$2 trillion plan to fight global warming is an ambitious one—it aims to invest US$1.7 trillion over 10 years to boost renewable power and catalyze consumers’ embrace of electric vehicles (EVs) through the introduction of tax credits. The plan also seeks to bolster research and development efforts in clean technology, including large-scale battery power storage, carbon capture and minimization, and modernizing infrastructure. In our view, these proposals may not be enacted in their entirety, even if the Democratic Party ends up becoming the majority party in both chambers of Congress.
Impact on the energy sector—oil, gas, and renewables
We believe a Biden administration will lead to the introduction of more renewable incentives and, at the same time, disincentives relating to the usage and production of fossil fuel. As outlined on his campaign page, the president-elect would like the United States to become a 100% clean-energy economy and achieve net-zero emissions by 2050—a goal that also drives his infrastructure plan. Crucially, it’s important to note that the Biden administration's plans are more targeted at encouraging renewable energy adoption than punishing fossil fuels. Nevertheless, his plans outlined several regulations that could create headwinds for further oil and gas production, including:
- Requiring more stringent methane pollution limits for new and existing oil and gas operations
- Potentially restricting, or making applications more difficult for, new oil and gas permits on federal lands and waters
- More restrictive policies on pipelines
- Modifying royalties to account for climate costs
While accelerating the country’s transition to renewables is laudable, investors should note that the effort will take a considerable amount of capital and time, and will require key players in the energy industry to make a significant investment in renewable energy.
As of 2019, renewables comprised about 6% of primary energy consumption in the United States versus 71% for oil and natural gas.1 Given the low base, the rate of renewables’ growth and adoption is expected to be considerable over the ensuing 10 to 20 years. Lower costs, accelerating policy support, and an exceedingly generous cost of capital should drive higher penetration. We think it’s worth assessing whether an overly restrictive policy on conventional oil and gas could have the unintended consequence of driving oil and gasoline prices higher—due to supply shortages—over the near to medium term should oil demand improve post COVID-19.
Impact on the mining sector—precious metals and base/industrial metals
Regardless of the shape or direction the next U.S. administration takes, we believe one of the clear long-term beneficiaries will be gold. The current wave of the pandemic suggests more fiscal stimulus will be needed to keep the U.S. economy afloat, even as the U.S. federal budget deficit hit a record US$3 trillion in 2020. Bear in mind—this is the deficit, not the government debt held by the public, which now stands at about US$21 trillion, or 102% of current U.S. GDP.
The current US$3.1 trillion deficit blew past the US$1.4 trillion deficit set in 2009, effectively tripling last year’s deficit of US$984 billion—all before the introduction of any further fiscal stimulus or energy plan by the Biden administration. This excludes economic stimulus we’ve seen come from unconventional monetary stimulus, where we witnessed nearly a doubling of the U.S. Federal Reserve’s balance sheet over the last six months, from US$4.1 trillion in February to US$7.1 trillion in November.2
In our view, the downward pressure on the U.S. dollar is likely to continue on the back of a prolonged low or near-zero interest-rate environment, expanding central bank balance sheets, and rising deficit spending. This backdrop will provide a much more solid footing for gold prices, which we believe could continue to inch upward over the next few years, all else being equal.
Biden’s plan to build sustainable infrastructure that will catalyze clean-energy adoption could be positive for a number of base and industrial metals.
Assuming he could win support from Congress, Biden’s plan to build sustainable infrastructure that will catalyze clean-energy adoption could be positive for a number of base and industrial metals. Copper’s widespread use in construction wiring and piping, as well as electrical transmission lines, makes it a key metal for civil infrastructure renewal. The growing popularity of EVs—which contain about four times as much copper as regular vehicles—and the construction of associated charging infrastructure—may contribute between 3.1 million and 4.0 million tons of net growth in annual consumption by 2035,3 with the supply side only able to respond at the margin. Separately, lithium miners could also do well since the white metal is key to manufacturing batteries for EVs.
Circling back to precious metals: Silver prices, already at six-year highs amid rising haven demand and tight supply, may be poised for an additional boost from a less well-known driver: rising demand from the solar panel industry. The metal, which is also used in solar panels, stands to gain as governments looking to jump-start economic growth and slow climate change pour more money into clean-energy technologies. In this scenario, Canadian miners, in particular, could benefit since the country produces 14 of the 19 metals and minerals needed for solar panels, and Quebec is home to one of the 10 biggest lithium mines in the world.
Some final thoughts
It’s natural to assume that the Biden administration may pursue a more ambitious climate-friendly energy plan if the Democratic Party wins control of the Senate this coming January. This will likely accelerate efforts to embrace the energy transition in the oil and gas sector, particularly among midstream and upstream companies.
That said, we already expected further steps forward on renewables and the energy transition from the midstream sector next year, regardless of who won the election. Company-wide greenhouse gas reduction pledges, net-zero carbon pledges with specific future dates, investments in renewables, and/or efforts to go after low-hanging fruit—such as targeting methane emissions reductions—are all possibilities to that end. Midstream companies are poised to accelerate their pace down this path. That said, the transition won’t happen overnight—oil and gas will still be part of the energy mix in the foreseeable future and some form of investment in these areas will be necessary.
This scenario will also likely bode well for the mining industry. We believe demand for industrial metals such as iron ore, copper, zinc, silver, and aluminum should rise on the back of consumer-focused stimulus and accelerated infrastructure investment, including in green technology. While these companies will increasingly need to be conscious of their ecological and carbon footprint, the demand for raw input materials needed to transition from fossil-fuel-based forms of energy and transportation to more ecofriendly forms provides a new secular tailwind that should benefit select industries and commodities in the years to come.
A widespread health crisis such as a global pandemic could cause substantial market volatility, exchange trading suspensions and closures, and affect portfolio performance. For example, the novel coronavirus disease (COVID-19) has resulted in significant disruptions to global business activity. The impact of a health crisis and other epidemics and pandemics that may arise in the future, could affect the global economy in ways that cannot necessarily be foreseen at the present time. A health crisis may exacerbate other preexisting political, social, and economic risks. Any such impact could adversely affect the portfolio’s performance, resulting in losses to your investment
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