Throughout history, there have been several changes and adjustments to energy policy via political administration changes that have had both positive and negative effects on the oil and gas industry. Most recently, the Trump administration’s goals were to lower regulations on the industry and let the oil flood gates open, while the Biden administration is moving rather quickly to focus on greater energy regulation and restrictions. As new policies are put into place, investors are left to speculate on what the effect will be on the price of oil and industry moving forward.
Over time, it is relatively intuitive that energy company growth and earnings have historically been driven by the price of oil and there is strong evidence of high correlation between the two. However, when comparing the price of oil to the President and their party, there is a much lower correlation. The graph below, dating back to 1968, depicts the price of oil under various administrations. As you can see, despite policies that can significantly influence regulatory policy in energy, the simple fact of a Republican or Democrat in the White House does NOT indicate a consistent trend in the price of oil.
Additionally, the graph below shows the performance of the energy sector, represented by XLE, during different administrations. This graph, like the previous, suggests that Republican or Democratic leadership does not determine how well or how poor the energy sector will perform.
While politics and administrations can be a factor for oil prices and the companies reliant upon oil production and processing, there are numerous other factors that determine the price of oil and the subsequent performance of the energy sector. The fundamental driver of oil prices is the balance of supply and demand. Actions taken by politicians can shift this equilibrium, but they cannot control outside influences to the same degree and companies have to be adaptable to changing conditions.
For example, more restrictive policies around drilling or fracking could reduce potential supply and boost the price of oil while less restrictive policies could create an oversupply and reduce the price.
Recently, President Biden:
- Revoked the permit for the Keystone XL pipeline that will reduce the amount of Crude Oil coming from Canada to the Gulf Coast1
- Halted oil and gas leasing on federal lands and water, which will decrease the number of areas oil and gas companies will be able to drill and reduce future supply2
These first two actions in his presidency would indicate more restrictive policies on oil, but this has not been the only factor in the current rise of oil and gas prices. Weather, economic conditions, and supply changes from OPEC and others also play a big role in determining the supply/demand equilibrium and ultimately the price per barrel. It is not enough to know the current administration’s energy agenda in order to accurately forecast the future price of oil. There are far too many other factors to consider and using one data point alone is not, in our opinion, a viable strategy for investment.
Within Gradient Investments portfolios, we have exposure to Energy companies to varying degrees. The recent years have been unkind to energy companies. This is a result of supply changes that added significantly more production (especially in the U.S.) while global demand has been growing at a much slower pace. Further, the rise of alternative energy sources like wind, solar, and electric have also had a negative impact due to substitution factors for fossil fuels. However, it is our opinion that fossil fuels will have a place in the energy infrastructure for some time and we will look to invest in companies in the energy space that are both opportunistically valued as well as adaptable to changing market and political conditions in the future.