As Donald Trump moves into the White House, it would be hard to dream up a cabinet friendlier to fossil fuels.
His nominees include Rex Tillerson, the former ExxonMobil chief tapped for secretary of state; Scott Pruitt, picked to run the environmental watchdog he fought as Oklahoma attorney-general; and Rick Perry, a former Texas governor set to head the energy department.
“Folks in the fossil fuel industry are optimistic and jubilant, and climate change advocates are despondent,” says Jake Dweck, a lawyer at the Sutherland firm who represents both conventional and renewable energy companies.
Will industry glee mean equal joy for energy investors? That is more complicated. Returns under a Trump administration will vary by form of energy, among them oil, gas, coal or renewables. Businesses that extract fuel sources will perform differently than those that transport or refine them. Changes to tax or trade policy could have a greater impact than narrow energy reforms.
The idea that expanding where companies can drill, easing the process of getting a permit and scrapping efforts to curb carbon emissions “will unleash an energy revolution,” as the Trump transition website put it, is untested. If more supplies do flow, they could depress energy prices and punish investors.
“It’s tricky in energy. You have to look at each of the different industries on their own,” says Chris Rhine, portfolio manager for natural resource equities at Cohen & Steers, a $56.5bn fund group.
So far, most money managers share the industry’s optimism. Since election day in November, the S&P 500 energy stock index has risen about 7 per cent. Energy bonds have rallied. Investors have pumped a net $3.9bn into US energy stock funds, according to EPFR, a data tracker.
“From my seat as an investor, the opportunity set is outstanding right now,” says Eric Scheyer, head of energy at Magnetar Capital, a $13.7bn hedge fund. He says Mr Trump’s cabinet choices pointed to a lighter permitting burden for oil and gas producers and pipeline companies, while the administration’s economic plans suggested rising inflation, which tends to favour “real assets” such as energy.
Not all energy will be made great again. Mr Trump the candidate pledged to revive the US coal sector, where miners have gone bankrupt in the face of competition from cheap natural gas, But the situation might only worsen if shale drilling accelerates. Many institutional investors have become leery of coal, which releases more heat-trapping carbon dioxide than other fossil fuels when burnt at power plants.
“Over the next 10 to 15 years, there really is no future for thermal coal,” says Norm MacDonald, portfolio manager of Invesco’s $1.2bn energy fund.
Mr MacDonald is keen on oil and gas, however, as he eyes the removal of what he calls “roadblocks” to further energy development under Mr Trump. “That is positive for equities and also for the oil business,” he says.
Climate was a priority for Mr Obama. He pushed through new rules to reduce methane leaks from oil and gasfields, curb flaring of waste gas on federal lands and improve fuel efficiency for cars. He blocked offshore drilling in swaths of the Arctic. He rejected the proposed Keystone XL oil pipeline from Canada into the US and halted construction of the Dakota Access pipeline in North Dakota, both of which had rallied environmentalist opposition.
Despite the crackdowns, US oil and gas companies managed to dramatically increase output during his term. Between January 2009 to January 2017, US crude oil production has risen from 5.1m barrels per day to about 8.9m b/d, while natural gas production increased from 57.5bn cubic feet per day to 72.3bn cu ft/d, according to the Energy Information Administration. Crude oil pipeline mileage lengthened by 39 per cent between 2009 and 2015, the latest transportation department data show.
Some policies may be easy for the Trump administration to nix, such as the recently enacted flaring rule. Other rules could take years to undo. Whatever the case, the bulk of US shale production is on private lands subject to state jurisdiction, not Washington’s.
“Federal energy regulation is not a huge factor affecting oil and gas,” Mr Dweck says.
Decisions on matters such as taxes and trade could influence the US energy picture dramatically. Tax reform could alter the appeal of tax-advantaged pipeline partnerships, for example. A Republican proposal for a “border adjustment” tax would probably raise the cost of imported crude for US oil refineries, analysts say.
Climate advocates may be morose, but federal tax credits for wind and solar power are set to survive for at least three more years based on a budget deal reached in 2015. More than half the US states also have renewable energy mandates of their own.
Ian Simm, chief executive of Impax Asset Management, which invests in clean energy and other environmental technologies, describes his approach to the Trump era as “cautious”.
“Given our generally positive outlook about the American economy, we’re certainly not minded to cut back on our commitments in the US,” he says.