Biden’s Four-Point Energy Plan:
On Wednesday, June 22, President Biden laid out his “Four-Point Plan” to lower US gasoline prices, which have recently exceeded an average of $5 per gallon nationally. Diesel prices have approached $6 per gallon. The plan includes:
- Asking Congress to suspend the gasoline tax ($.18/gallon for gasoline and $.24/gallon for diesel) for 90 days.
- Asking states to suspend their gasoline taxes.
- Asking oil companies to use profits to increase refining capacity.
- Asking gas station owners to pass through savings from lower oil prices to consumers.
The reasoning behind the President’s speech is no mystery. High gasoline prices are a political liability and can hurt the Democrat’s chances in the coming November elections. However, none of these proposals is directly under the President’s purview, three of them are outside of the direct purview of the federal government and the impact of implementing any of them appears limited, and I question how serious they are. I will tackle each item below.
1. Congress can suspend the gasoline tax. However, unless Republicans support the measure (and they might for political reasons), it would require nearly unanimous votes by Democrats in the House and all Democratic Senators. It is not clear that far left, environmentally conscious members of the party would support such a cut. Moreover, doing so would remove the tax dollars used to maintain the nation’s interstate highway system.
2. States can (and some like New York have) temporarily suspend their gasoline taxes. This measure is entirely up to individual states. I don’t see how asking states to do something that some of them are already doing is part of a master plan by the nation’s chief executive.
The irony, of course, is that lower taxes might help offset any demand destruction and therefore potentially leading to higher prices.
3. Refining capacity has been declining in this country for decades. No new gasoline refinery has been built since 1977. Several, including the massive Philadelphia Refinery, closed during Covid because of lack of profitability. Moreover, integrated oil companies like Shell (SHEL) have been exiting the refining business because inputs and outputs are highly cyclical, and it is considered a “dirty” business by many in the ESG community. Permitting to build a new refinery would likely be incredibly difficult if not impossible to obtain, and I believe few companies would use today’s high refining margins in their projections for a new project’s profitability.
4. This last point by the President is perhaps the most futile. Large oil companies do not own many 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 buy the same gasoline available to a gas station owner in Alabama, provided both have access to transportation for the product. Asking gas station companies to pass through oil price reductions is like asking the corner grocery market to pass through lower corn prices when they sell corn flakes.
How Serious is the Intention?
There have just been too many instances and actions that run counter to lowering energy prices. In a May speech in Tokyo, the President said, “when it comes to the gas prices, we’re going through an incredible transition that is taking place that, God willing, when it’s over, we’ll be stronger and the world will be stronger and less reliant on fossil fuels.” Also in May, when asked by Wyoming Senator John Barrasso, “Do you believe that gas prices are too high?” Interior Secretary Deb Haaland repeatedly refused to say so.
These are not the words of people who seem overly concerned with the price of gasoline. Rather, it indicates people who believe that high gasoline prices are something that people will just have to absorb as we transition to electric vehicles.
It’s not just words. On his first day in office, President Biden revoked the permit for Keystone XL, which was planned to bring oil from Canada into this country. He also halted all new leasing of federal land for oil and gas exploration in his first week as President. Equitrans’ (ETRN) Mountain Valley Pipeline, a multibillion, 300-mile interstate pipe that could move more gas produced by companies such as EQT (EQT) from the Marcellus to Virginia is still waiting on a permit to go through three miles of federal forest. It is hard to criticize companies for not producing more oil when items tied to oil and gas production in direct federal control were first in line on the chopping block when the President took office or remain in bureaucratic hell that the President could likely end with a stroke of his pen.
It’s All About Supply and Demand:
I do not intend this post to be political, and I actually do not lay much of today’s current oil and gas or gasoline pricing at Biden’s feet. The industry basically lit money on fire from around 2009 until 2016. Lousy returns and shareholder revolts led the industry to reduce investment in new production and refining capacity for several years. Commodities are all priced on the margin. Enough marginal capacity came out of the system during Covid and enough potential capacity remains stranded from lack of pipeline infrastructure that the balance shifted from energy consumers to producers. That said, I am not letting the President off the hook.
Biden has spoken openly about pivoting away from fossil fuels since he was a candidate. He could reverse his decision on Keystone XL, get Mountain Valley its permits, encourage interstate pipeline construction (perhaps through federal guarantees), and end the export of refined products. That he has not done any of that leads me to question whether the admin is suddenly viewing the oil and gas industry as a potential resource or whether high prices are just short-term hurdles to address before an election. In that light, the SPR release, which is finite, is a clear short-term solution. It might weigh on oil prices temporarily but likely might only fill the production hole that OPEC has not been able to fill. Moreover, the SPR release comes at the cost of lowering our reserves massively and removes a cudgel we formally possessed against OPEC.
Meanwhile, Russia continues to reduce natural gas supply to Europe, leading prices back close to highs there. Sanctions on Russian oil and refined products are also leading to high gasoline, diesel, and jet fuel in Europe, which is helping drive refined products higher worldwide.
Impact for Energy Equity Investments:
Given this ultimate futility of increasing energy production and increased refining capacity, my long energy view, which I first espoused last summer and followed up several times, has not withered. If anything, it has strengthened. My favorite plays by them and region are:
- European Natural Gas: Equinor (EQNR) and Vermilion Energy (VET). I have been long EQNR for all year and recently updated my thoughts after meeting with management. I met with Vermilion management at the same conference. Both companies have enormous exposure to European natural gas prices and are generating immense cash at these prices.
- US Natural Gas: EQT, Chesapeake (CHK), Crestwood (CEQP) and Enterprise Products (EPD). EQT and CHK are generating enormous cash flows and aggressively returning that cash to shareholders given bulletproof balance sheets. CEQP and EPD should benefit from strong volumes and modest new drilling. As I wrote on EPD, it benefits from increased NGL exports. My recent write-up on CEQP walked through the accretive portfolio repositioning.
- Carbon sequestration and Renewable Energy: California Resources (CRC) and Darling Ingredients (DAR). California Resources is a unique play on a strong California energy footprint and, as I wrote, a cheap if not free option on carbon sequestration, which could be a multi-billion opportunity. Strong diesel prices benefit Darling Ingredients via its stake in Diamond Green renewable diesel refinery while the proliferation of renewable diesel plants aids DAR’s core business.
Risks to Energy Investments:
As we have just seen in the recent drawdown of energy stocks, the sector is both volatile and can be linked to the price of WTI oil prices regardless of that pricing’s ultimate impact on any company’s bottom line. The good news is that many of the above companies ultimately have little exposure to overall commodity pricing thanks to hedges or just the nature of their business (especially the midstream players CEQP and EPD). For those who can absorb the volatility, these selloffs present excellent entry points.
Obviously, there is also a risk that some new half-baked idea comes out of DC against energy, such as windfall taxes. The UK has already applied a windfall tax on energy companies. I do not believe any tax will increase production or lower prices. If anything, it might discourage increased exploration expenditure as profits will be penalized.
Just as most of the previous actions by the current administration have not had any major impact on commodity prices, I suspect the Four-Point Plan will be equally toothless. If you see lower energy prices, I expect it will result from simple supply and demand rather than anything this admin has proposed or will enact.