The upcoming US elections could have significant implications for energy policy, especially in the oil and gas sector. In a letter to clients on Monday, 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 can still have significant consequences, especially in the long term, Morgan Stanley notes.
Strategists point out that energy policy has become a central issue 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 fight inflation.
One of the major potential shifts under a Trump administration would be in the regulatory landscape. The report suggests that Trump could push for deregulation, especially in areas that facilitate oil and gas production.
This could include “rolling back Biden-era rules on climate-related emissions targets (including the methane tax or reversing the president’s pause on gas export permits), or relaxing 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 “end market-distorting restrictions on crude oil and coal.”
However, Morgan Stanley warns 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, especially when it comes to leasing federal lands for oil and gas development.
“There is a lag between policy implementation and a change in production levels,” strategists noted.
“For example, changes in federal land leasing may have a roughly ten-year tail between the policy change and the impact on production, as policy changes are typically proposed for future, non-existing, leases.”
The report also highlights the tension between simultaneously increasing oil production and lowering prices. While Trump has advocated for a significant increase in domestic oil production, achieving this without causing prices to fall could be a challenge.
“Significantly increasing production would likely involve drilling more expensive wells, which could put pressure on profitability if oil prices fall,” strategists said.
Moreover, US oil production is already at a record high and continues to grow, making further acceleration difficult under a second Trump administration.
Morgan Stanley emphasizes that “the economics of substantially increasing production while lowering prices is challenging,” suggesting that these conflicting goals could limit the effectiveness of Trump’s proposed energy policies.
Internationally, a second Trump administration could also influence 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 up global oil prices.
Trump’s stance on import tariffs, especially those on Chinese goods, could also affect global trade and demand for raw materials, with broader implications for energy prices.
Additionally, subsidies for electric vehicles (EVs) in the Inflation Reduction Act (IRA) could have an impact.
“Trump has opposed EV subsidies, which has increased the likelihood that his administration could, in the event of a Republican victory, roll back the electric vehicle credit in the IRA,” analysts said.
“In the short term, we believe this would have only a modest impact on domestic oil demand. However, this may become more important over time.”
The potential impact on natural gas is also notable. The report notes that building interstate pipelines could be made easier through Republican action, unlocking cheap gas supplies from regions like the Marcellus Shale. However, the report states that the overall impact on US gas prices is likely to be limited.
Morgan Stanley also discusses the implications for the US energy sector, especially as it relates to natural gas prices. The report suggests that any significant changes in natural gas prices could have a direct impact on electricity costs, especially in markets where gas-fired power plants dominate.
“Rising gas prices should support rising energy prices and EBITDA for energy stocks,” the note said.
On the other hand, strategists also warn of downside risks, such as possible cancellations of LNG cargoes or lower demand for US gas exports, which could put pressure on prices and, by extension, energy sector revenues.
