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Biden win poised to reshape US energy policy

A Democratic victory could spell an end to hostilities with the Islamic Republic of Iran and send a jolt through the global oil market

A US election win for Democratic presidential candidate Joe Biden would create a major shift in energy and climate priorities, as showcased by his ambitious domestic policy agenda. His top priority would be economic recovery, with a strong inclination to spend on green infrastructure and accelerate the transition away from fossil fuels. But as with past administrations, a rise in oil prices could still force a Biden administration to change tack.

President Donald Trump’s “energy dominance” narrative centres on maximising US oil and gas exports and leveraging the country’s new energy abundance. The president has been emboldened to impose sanctions on several oil-producing states, with a lower risk of price spikes in a well-supplied market. He has also made forceful interventions in Opec’s market balancing decisions. But the current oil price downturn has eroded the foundations of this approach, reversing America’s brief status as a net exporter of crude oil and liquid fuels.

In contrast, Biden frames energy competitiveness in a very different manner. And along with the Democratic Party, his energy and climate views have shifted to the left over the past year. He has pledged to halt new oil and gas leasing on public lands, end fossil fuel subsidies and impose much stricter methane pollution standards, although he has not called for a complete ban on hydraulic fracturing. It is safe to assume Biden would not offer Trump’s rhetorical or material support to the oil sector, or give it such prominence in diplomatic affairs.

c.2.5mn bl/d – Iranian exports waiting to return to market

Biden has not offered much detail on most geopolitical issues directly relevant to the oil market. But a revival of the Iran nuclear deal, known as the Joint Comprehensive Plan of Action (JCPOA), could result in US sanctions being curtailed next year, creating a significant bearish price risk.

Biden has suggested he would return to the nuclear deal and seek to strengthen and extend it as long as Iran returns to compliance. But this will not be easy. Iranian politics has changed, with punishing US sanctions and a host of other domestic issues weakening moderates such as President Hassan Rouhani.

Oversupply

Scepticism of US intentions also extends across the Iranian political spectrum, and a Biden administration would have limited time to deal with Rouhani’s government before the next Iranian presidential election, slated for mid-2021. If the JCPOA were to be reactivated, at least half of the roughly 2mn bl/d of Iranian oil exports lost since April 2018 could conceivably return to the market in 2021. Much will depend on how quickly Iran could ramp up its output, but an easing of US sanctions pressure would add to anticipated oversupply and pile the pressure on Opec+.

A dramatic shift in Venezuela policy seems less likely. The Democrat’s draft policy platform, released in July, advocates “smart pressure and effective diplomacy” as opposed to the Trump administration’s reliance on sanctions. Biden would probably be inclined to retain pressure on Venezuelan president Nicolas Maduro, but perhaps reinvigorate diplomacy in concert with other countries. Sanctions relief seems unlikely in the near term, and the precipitous drop in Venezuelan output should continue into 2021.  

Finally, the US-Saudi Arabia relationship remains on shaky ground, and a Biden victory in November could produce important changes. Congress has become much more critical of Saudi Arabia in recent years, following the prolonged war in Yemen and the killing of Saudi journalist Jamal Khashoggi.

Biden has echoed these concerns. Riyadh will be concerned that a Biden victory would end its close relationship with the Trump White House and weaken its shield from congressional criticism. Still, Biden’s personal inclination is to maintain constructive relations with countries of importance. A Biden administration would probably mean a return to form for the US-Saudi relationship, with less overt pressure on oil market issues and a stronger focus on traditional security matters, including the need to protect critical infrastructure.

Ben Cahill is a senior fellow in the Energy Security and Climate Change Program at the Center for Strategic and International Studies.

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