by Raymond J. Keating –

Markets are forward looking. Elected officials would do well to keep this in mind when they rail against various industries, and threaten increased taxes and regulations.

Indeed, while businesses, industries and the economy are undermined when taxes and regulations are imposed and the full costs of these government command and controls are actually inflicted, the ills do not start at that point. Rather, problems begin when elected officials and their appointees start making clear their intentions. That is, when the political class starts issuing constant and clear threats at targeted businesses, industries and investors.

Consider recent developments in the oil and natural gas industry as government – i.e., in the U.S., President Biden and the Democratic majority in Congress – pushes a regulatory agenda that is hostile to the development and use of oil and natural gas. President Biden has been clear in setting an agenda focused on having the United States electricity generation to be 100 percent renewable by 2035 and there being net-zero emissions in the economy by 2050. That comes with regulatory dictates and mandates that will impact energy prices and our economy at large.

It must be noted that there is some degree of political absurdity at work here. After all, this is nothing more than political guesswork and posturing, never mind the fact that President Biden will be leaving office at the start of either 2025 or 2029.

Still, to the extent that a president sets an agenda for his party and at least for part of the country, coupled with the particularly troubling fact that Congress over the years has abdicated certain powers to the executive branch under the guise of “national security” or “national emergency,” these political goals will and do have very real effects on decisions in the marketplace.

Actions Related to “National Security” are Troubling

Indeed, particularly troubling are the assorted actions that can be taken by a president against the energy industry under so-called “national security.” That was recently summarized in a Wall Street Journal analysis authored by Tristan Abbey. As Abbey wrote:

“Because Congress and the courts have ceded power to the executive branch over the past several decades, the president, if he so chose, could co-opt powerful national security tools to reduce U.S. carbon emissions. As midterm elections approach, progressives will pressure President Biden to do exactly that.”

Tristan also zeroed in on the damage that can be done even before any regulations actually are implemented:

“The U.S. government has the power to destroy the financial viability of politically incorrect forms of energy by raising costs, deepening uncertainty, and discouraging investment, regardless of judicial outcomes.”

Consider the ills stemming from initial regulatory actions taken by Biden upon entering office early this year as noted by Bloomberg Law (January 28, 2021):

“Biden issued several directives Wednesday designed to fight climate change, including the leasing pause [for oil and gas leasing on federal lands], a review of fossil fuel subsidies, and other measures to overhaul the U.S. energy mix.

     “State officials cited dramatic figures about the economic impact of a leasing halt from a University of Wyoming study in December conducted for the Wyoming Energy Authority, an agency whose mission is ‘to advance the state’s energy strategy by supporting Wyoming’s full energy portfolio.’ 

     “The calculations show that in the president’s first term alone, gross domestic product across eight oil and gas producing states—Alaska, California, Colorado, Montana, New Mexico, North Dakota, New Mexico, and Utah—will decline by $33.5 billion, slashing 58,786 jobs, $15 billion in wages, and $8.3 billion in state tax revenues.”

There certainly are whiffs of other developing problems.

Negative Effects on Investment and Energy Industry Activity

For example, a recent Reuters report noted increasing demand for liquefied natural gas (LNG) and rising prices, yet new spending on projects have “halted.” While going through assorted causes, at one point it was noted:

“‘We’re setting up for a structural shortage of LNG capacity,’ said Reid Morrison, global energy advisory leader at PwC in Houston. ‘There is reticence to taking a long-term position in natural gas given the net zero commitments that different governments are making.’”

Another way of putting that would be “given the hostility to fossil-fuels-based energy exhibited by various governments.”

Another Reuters story highlighted that oil and gas lease sales offering tracts on the North Slope and Beaufort Sea in Alaska “drew almost no bids.” In fact, “It was the fewest bids submitted for a North Slope auction since 1999, when the state began its annual leasing program that offers all available state-owned territory in designated basins.”

Again, a variety of factors come into play, but governmental regulatory threats cannot be ignored.

It was simply pointed out in an Argus Media report, “And with environmental pressures growing, the sector as a whole remains out of favour.” That is, to be more precise, given the politics at work and with the lobbying pressures of environmental groups, oil and natural gas investments have fallen out of favor.

The economics actually are straightforward: Threaten oil and natural gas development and production, and such development and production will be undermined. Indeed, investors will have every incentive to shift their resources elsewhere.

As The Wall Street Journal editorial board stated recently: “…U.S. producers have also been slower to revive output as the Administration is threatening the oil and gas industry with a panoply of taxes and regulation. Producers aren’t going to drill more wells today, even at today’s higher prices, if they don’t think they will produce future profits.”

Reminder: U.S. Energy Industry is Dominated by SMBs

It must be pointed out that the oil and natural gas sectors of our economy are overwhelmingly about smaller businesses. Consider the breakdown among employer firms (latest Census Bureau data 2018) in major energy sectors:

So, the policy attack on the oil and natural gas sectors is one that is hitting entrepreneurs, small businesses and their employees.

And the regulatory attack continues to mount, with President Biden recently asking the Federal Trade Commission (FTC) to investigate if oil and gas companies are engaging in “illegal conduct” due to recent high gas prices. Here’s another case of ignoring basic economics and market operations – such as increased demand coupled with supply challenges and, again, regulatory intrusions – and making matters even worse via hostile regulatory signals from the federal government.

Political wishes and speculation are not going to change the realities of energy needs in the U.S. and around the world today or well into the future. And economic reality cannot be altered or wished away because certain special interests demand it.

The smartest policy remains letting markets work by creating the best policy climate in which investment, innovation, development and production in all kinds of energy sources and production can flourish, all disciplined by prices, profits, losses, private-sector competition, and consumer choice.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.