The upcoming U.S. election could have significant implications for energy policy, particularly in the oil and gas sectors. In a Monday note to clients, Morgan Stanley strategists discussed the potential changes that could emerge under a hypothetical second term for former President Trump.
While presidential authority on energy policy is limited, certain actions could still drive notable impacts, particularly over the long term, Morgan Stanley notes.
Strategists point out that energy policy has become a central theme in Trump's campaign, linking domestic energy production to broader economic outcomes such as inflation and consumer prices. Trump has consistently argued that increased domestic energy production could lower costs for consumers, positioning energy policy as a key lever to combat inflation.
One of the significant potential shifts under a Trump administration would be in the regulatory landscape. The report suggests that Trump could push for deregulation, particularly in areas that facilitate oil and gas production.
This could involve “rolling back Biden-era rules on climate-related emissions targets (including the methane fee or reversing the President's pause on gas export permits), or easing the environmental review period required for project approvals,” strategists said.
The GOP platform supports this approach, promising to "increase energy production across the board" and to "end market-distorting restrictions on oil, natural gas, and coal."
However, Morgan Stanley cautions that these policy changes are unlikely to result in immediate shifts in production levels.
There are inherent delays between policy implementation and actual production changes, particularly when it comes to leasing federal lands for oil and gas development.
“There's a lag between the policy implementation and a change in production levels,” strategists noted.
“For example, leasing changes on federal land can have an approximately 10-year tail between policy change and production impacts, as policy changes are typically proposed for future, not existing, leases.”
The report also highlights the tension between increasing oil production and lowering prices simultaneously. While Trump has advocated for significantly ramping up domestic oil production, achieving this without driving prices down could be challenging.
“Raising output significantly would likely involve drilling wells that are more costly, which could pressure profitability if oil prices decline,” strategists pointed out.
Furthermore, U.S. oil production is already at an all-time high and continues to grow, making further acceleration under a second Trump administration difficult.
Morgan Stanley emphasizes that “the economics of raising production substantially while lowering prices are challenging,” suggesting that these conflicting goals may limit the effectiveness of Trump’s proposed energy policies.
On the international front, a second Trump administration could also impact global oil markets through its foreign policy.
The note points to the possibility of a return to the "maximum pressure" campaign on Iran, which could lead to a significant reduction in Iranian oil exports, potentially driving global oil prices higher.
Trump's stance on import tariffs, particularly those on Chinese goods, could also affect global trade and commodity demand, with broader implications for energy prices.
Moreover, subsidies on electric vehicles (EVs) in the Inflation Reduction Act (IRA) could make an impact.
“Trump has pushed back against EV subsidies, which has raised the probability that, in the event of a Republican win, his administration could reverse the electric vehicle credit in the IRA,” analysts said.
“In the short term, this would have only a modest impact on domestic oil demand, in our view. However, this could become more important over time.”
The potential impact on natural gas is also noteworthy. The report mentions that the construction of interstate pipelines could be made easier under a Republican sweep, which might unlock low-cost gas supplies from regions like the Marcellus Shale. However, the report maintains that the overall impact on U.S. gas prices would likely be limited.
Morgan Stanley also discusses the implications for the U.S. power sector, particularly in relation to natural gas prices. The report suggests that any significant changes in natural gas prices could directly impact electricity costs, especially in markets where gas-fired power plants dominate.
“Rising gas prices should support rising power prices and EBITDA for power stocks,” the note writes.
On the other hand, strategists also warn of downside risks, such as potential cancellations of LNG cargoes or lower demand for U.S. gas exports, which could pressure prices and, by extension, power sector earnings.