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July 25, 2016
The impact of the US elections on energy planning and investment
By: Julie Adams

The energy sector in the United States has been transformed over the past few years by the shale oil and gas revolution. The industry is increasingly vital as the US becomes energy-sufficient and grows as an exporter. There are now a number of issues facing the oil and gas industry in a heated election campaign season which is being increasingly marked by polarization.

Is shale oil here to stay?
Low oil prices have strained exploration and production companies in the US as elsewhere, but US shale oil is likely to start to see a brighter horizon as oil prices are stabilizing and starting to recover. In terms of cost to supply, US shale is in the middle to upper-end of the cost curve compared to other extraction techniques. While there are lower-cost regions such as the Middle East, US shale oil remains less costly to extract and transport than some deep-water resources in Africa and from the oil sands in Canada.

US shale oil is also becoming cheaper to produce due to innovative technologies and efficiency improvements. Producers of shale oil also enjoy comparative agility in turning off (and ramping up) supply to meet changing demand. Considering various price and capital-flow scenarios, substantial production of shale oil is still possible in the next five to ten years which will maintain the US as an increasingly important producer of energy and continues to drive it further to self- sufficiency.

What are the potential consequences of the forthcoming US elections on energy policy?
These elections are expected to have a huge impact and consequences for the US energy industry, which, along with questions about climate change and clean energy, have become increasingly partisan issues across the country.

Not only will a new US President be elected in early November, but there could be a swing in leadership of the US Senate, and perhaps (though less likely) in the US House of Representatives. In addition, the President appoints justices to the Supreme Court, where there is already one vacancy, with two or more appointments possible for the incoming president.

Policies designed to promote renewable energy are also under review including Environmental Protection Agency rules on clean energy, and factors like the composition of the Supreme Court might shift the direction of evolving regulatory frameworks.

Additional US energy issues likely to be in the policy spotlight from late 2016 include:

  • Corporate Average Fuel Economy (CAFE). Debates about a boost in miles-per-gallon efficiency comes up again, possibly leading to higher standards for fuel economy for vehicles.

  • Renewable Fuel Standard (RFS). Policy encouraging biomass is another heated issue, and revised standards affect the US Midwest, in particular, which grows corn for ethanol.

  • Stricter regulation of the energy industry. President Obama agreed with the Canadians to push an aggressive standard to capture methane. An incoming administration could push to regulate additional areas, such as seismic activity in Oklahoma, water and chemical use in hydraulic fracturing, and exploration in various areas such as the Outer Continental Shelf.

  • Investments in renewable energy. The scope and scale of green-energy incentives offered may change with new political leadership.

How is investment likely to be impacted?
The US energy industry currently faces a difficult period in terms of planning. The political issues listed above could have a huge impact because of fundamental shifts in policy. Court decisions on clean energy rules, for example, are likely to alter investment decisions such as natural gas versus coal. Given multiple contentious issues, leaders of energy businesses might ironically find long-term planning easier than making shorter terms investment decisions—say over the next six months.

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