The market will decide
Donald Trump will learn soon enough that market and domestic political pressures, not government regulation, will continue to define what's possible

When Donald Trump strides into the White House on January 20, the first person elected U.S. President without government or military experience, he’ll inherit a set of energy policy options that George W. Bush couldn’t have imagined. Innovation has brought fundamental change to energy markets, but managing that change will require some tough choices, particularly for someone with no background in energy policy. He’ll learn soon enough that market and domestic political pressures, not government regulation, will continue to define what’s possible. Full Republican control of Congress will make a big difference, but it can’t override the importance of these factors.

The new line on the face of climate change

The first Trump point of departure from the Obama administration centers on tradeoffs between aggressive energy and environmental protection policies. 2016 saw considerable movement on multinational coordination of climate change policies, and Obama was a primary driver of momentum toward signing and ratification of the Paris Agreement. President-elect Trump will likely trigger the four-year process for withdrawal from the deal and will shrug off the U.S. domestic emissions targets agreed to in it. The effect on further climate talks will be immediate. Though other governments, particularly in Europe, are unlikely to withdraw entirely from Paris commitments, there will be little reason to believe that emissions cuts that don’t include the U.S. can help contain the increases in global temperature that made concessions politically possible for most industrialized countries. High expectations from climate advocates for future talks will lose credibility. In addition, Republican control of both houses of Congress will make it easier for industry advocates to reduce the Environmental Protection Agency’s (EPA) authority to regulate greenhouse gas (GHG) emissions. The Trump administration will quickly target President Obama’s Clean Power Plan (CPP), which sets state targets for reduction of GHG emissions and a national goal of cutting power sector emissions by 30 percent by 2030. The plan was not due to take effect until 2022, but it would have forced a near-term transition away from coal use toward natural gas and renewables. The plan already faces a legal challenge, and the Trump administration will not defend it.  In general, GOP control of Congress will help the new administration reign in EPA authority on GHG reductions. In other areas, the break in administrations will be less obvious. The picture for renewables is mixed. Dismantling the CPP will certainly reduce long-term investment in this sector, but the Trump administration and GOP lawmakers are unlikely to target multi-year tax credit extensions for wind and solar established in 2015, and a number of states will continue to push for a faster shift in the fuel mix toward renewable energy. Markets will also continue to favor development of renewables as technological progress continues to lower production costs.

President Donald Trump will open a lot more federal acreage, both on and offshore, for the exploration, development and production of oil and gas..

Increasing exports of oil and LNG

In addition, the benefits of Trump’s victory for the U.S. oil and gas industry will likely be more limited than some assume. The new president will quickly relax federal regulations on hydraulic fracturing, and although Trump has made clear his opposition to existing trade deals, he and fellow Republicans are committed to boosting U.S. oil and gas production. U.S. crude and liquefied natural gas (LNG) exports will continue their growth while Trump is in the White House. But in other areas, we’ll see the new president wrestle with tough political problems. His administration and the Republican congressional leadership could benefit the oil industry through reform of the Renewable Fuel Standard by cutting back on ethanol mandates. But given the importance of Midwestern states for Trump’s victory and the importance of these mandates for Corn Belt states, that might not be the smartest political move. That’s why the new administration is likely to leave that issue alone. President Trump will open a lot more federal acreage, on and offshore, to oil and gas exploration and production. But his plan to shelve many environmental regulations on the power sector could undermine demand for natural gas. In addition, we shouldn’t expect a sudden new surge in fracking, which has been central to the U.S. energy revolution, because low global oil prices rather than onerous federal regulations are primarily responsible for slowing drilling and production. That outlook is unlikely to move much in coming months, because officials in the Organization of Petroleum Exporting Countries (OPEC) and non-OPEC exporting countries know well that U.S. production can respond relatively quickly to any meaningful price increase, costing them precious market share.

Long live pipelines and coal-fired plants

On pipeline politics, grassroots environmental groups will pump up the volume on protests, though the loss of a crucial ally in the White House will slow momentum behind the U.S. "off-oil" movement, and pipeline construction will remain subject to state-level challenges. In the near term, it may be Canada’s oil industry, particularly the upstream oil sands sector, that feels the first positive effects of Trump’s arrival. The president-elect has pledged to approve the embattled Keystone XL pipeline should TransCanada resubmit its application, opening the preferred market access option for oil sands producers. On coal, the industry won’t benefit from the assault on Obama’s Clean Power Plan as you might expect. Trump will almost certainly keep promises to help existing coal-fired facilities that might have been forced out of business by a Clinton victory, and elimination of environmental regulations that promote fuel switching in the power sector will certainly help the coal sector. Yet, here too the market, not government plans, is driving the outlook. It’s the reduced cost of natural gas, rather than the CPP, that will encourage utilities to hedge their investment bets on coal’s revival. In short, Trump’s victory will bring real change in energy and climate policies, but markets and political realities will limit just how much the new president can do.