Lee Zeldin, Administrator of the U.S. Environmental Protection Agency (EPA), recently announced sweeping changes to environmental rules and regulations. Zeldin claimed these changes would deal “a dagger straight into the heart of the climate change religion,” arguing that eliminating these regulations could save $1 trillion in regulatory costs. While industries like energy, manufacturing, and mining stand to benefit most from these changes, they make up only $6 trillion of the U.S. GDP. Thus, a $1 trillion reduction in their costs could have a significant impact.
Simultaneously, Trump administration officials have called for oil prices to drop to $50 a barrel to help curb inflation. This suggests they want the savings from the deregulation to be passed on to consumers.
Many in the energy industry are celebrating the potential for reduced environmental restrictions, including unlimited carbon emissions and the end of electric vehicle tax credits. However, despite this regulatory shift, the reality of the energy market remains unchanged. The oil industry is still dealing with a slow-growing market, and even with deregulation, the demand for oil cannot be artificially created. Furthermore, Chinese manufacturers are producing low-cost electric vehicles and making strides in solar energy, putting pressure on traditional fossil fuel industries.
In the U.S., new coal-fired power plants are unlikely unless they are heavily subsidized due to the risk of future climate regulations. However, some existing coal plants that were set for retirement are being kept in service. The natural gas market, on the other hand, seems more promising for two key reasons. First, there is a need to replace Russian gas supplies, unless a deal with Russia is made. Second, U.S. electric power generators have a strong preference for natural gas, and this transition was anticipated by energy executives, even those who deny climate change.
This shift toward natural gas could face challenges in the future if the EPA is restaffed and renewables with storage become more cost-competitive. For long-term energy investors, the Trump administration’s actions do not provide enough certainty. While the administration may seek a second term, the lifespan of energy infrastructure—like power plants—spans 40 years, making it vulnerable to future regulatory changes.
For investors, the current market may offer opportunities to sell assets to those who are overly optimistic about the energy market. It’s a move that goes against the notion of “drill, baby, drill,” as it lacks capital discipline. For those concerned about the risk of missing out on price increases due to economic recovery or global crises, buying futures could be a safer option.
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