Washington outlook: U.S. mid-term election results potentially ominous for the oil and gas industry
It’s a new year, with a new Congress but the same old players in the Executive Branch. The question is which issues will the administration give priority to and throw at the U.S. oil and gas industry, and how does the Republican majority intend to stop and/or blunt those efforts?
The 2022 U.S. mid-term elections were held on Nov. 8. All 435 seats in the House of Representatives and 35 of the 100 seats in the Senate were contested. Thirty-nine state gubernatorial and numerous other state and local elections were also contested. The Republicans narrowly won control of the House, 222–213 (Fig. 1), while Democrats slightly expanded their majority in the Senate by one.
While midterm elections typically see the incumbent president's party lose a substantial number of seats, Democrats dramatically outperformed the historical trend, and a widely anticipated “red wave” never materialized. Rather, the battle for control of Congress was much closer than expected.
The Democratic Party's strength in state-level and senatorial elections was historic, as well as unexpected. Democrats won a net gain of two seats in the gubernatorial elections, and 2022 is the first mid-term since 1934 in which the president's party did not lose any state legislative chambers or incumbent senators. It was also the first mid-term since 1986 in which either party achieved a net gain of governorships while holding the presidency, and the first since 1934 in which the Democrats did so under a Democratic president.
CHAOS IN THE HOUSE
In early January, the U.S. House of Representatives witnessed the most prolonged stalemate to begin a new Congressional session since 1859—before the Civil War. It took Kevin McCarthy (R-Calif.) 15 ballots over four days to win enough votes to become Speaker. However, the price of victory was high—both in lost authority for the Speaker and likely in the ability of the Republican majority to get much accomplished, including energy, Fig. 2.
A group of backbenchers seized an opportunity to exploit the narrow Republican margin of five seats to put themselves in positions of power. To end the crisis, McCarthy cut a deal that essentially traded away a sizable chunk of power from the position, placing the new Speaker at the mercy of the very members who had opposed him. Under the agreement, any Republican can demand a vote on his ouster. He committed the party to pursue steep and politically unpopular budget cuts while ensuring a partisan battle over the debt ceiling that would damage the economy—see below.
McCarthy’s struggle to attain the speakership illustrated how much of a challenge he will have in leading a narrow, deeply divided majority. However, his capitulation to the holdouts could make the House all but ungovernable.
DEBT CEILING SHOWDOWN
The U.S. hit its debt limit on Jan. 19, 2023, requiring the Treasury Department to begin a series of “extraordinary” accounting maneuvers to ensure the federal government can continue paying its bills until early June. This was done ahead of what will be a protracted fight over increasing the borrowing cap.
House Republicans have vowed that they will not raise the borrowing limit again unless President Joe Biden agrees to substantial reductions in federal spending. Biden stated he will not negotiate conditions for a debt limit increase. However, the U.S. risks a financial crisis and other serious economic pain, if lawmakers do not raise the limit before the Treasury Department exhausts its ability to fund the government.
This has prompted fears because of the lessons both parties took from a decade of debt-limit fights. A bout of brinkmanship in 2011 between House Republicans and President Barack Obama nearly ended in the U.S. defaulting on its debt before Obama agreed to a set of caps on future spending increases in exchange for lifting the limit.
Democrats have solidified in their position that negotiations over the debt limit only enhance the risks of economic calamity by encouraging Republicans to use it as leverage. Newly elected Republicans have pledged not to let that happen again. They will be opposed by Democrats, who control the Senate and the White House. McCarthy must confront how to raise the debt ceiling and keep the government functioning.
The U.S. defaulting on its debt would result in a national and international economic calamity, and it would not be good for the O&G industry. How bad, we do not know, because it has never happened—although the experience in 2011 when the U.S. almost defaulted offers a cautionary tale.
HOUSE ENERGY PACKAGE
House Republicans are preparing an energy and environment package that could emerge as one of the first pieces of major legislation passed by the Republican-controlled chamber. Largely based on legislation proposed by the Chair of the Energy and Commerce Committee, Cathy McMorris Rodgers (R-Wash., Fig. 3), and the Natural Resources Committee’s Chair, Bruce Westerman (R-Ark.), the package aims to unleash domestic fossil fuel production. The package will follow an edict from Speaker McCarthy, who has indicated that energy policies to help attain American energy independence and lower energy prices are among the House’s first priorities.
McMorris Rodgers stated, “We need to return to American energy independence and bring down gas prices, and that’s unleashing American energy,” and discussions are underway to specify what the package contains. She indicated that the foundation would come from the “American Energy Independence From Russia Act,” H.R. 6858, and “Securing America’s Mineral Supply Chains Act,” H.R 8991.
The first of the bills provided numerous policies that would undercut Biden Administration energy decisions, including a restoration of the approval of the Keystone XL pipeline, directions to offer public lands for fossil fuel production, and measures to streamline LNG exports. The bill reads as a list of Republican objections to the slow-walking of fossil fuel project approvals by the Biden Administration. Republicans repeatedly attempted to press Democrats to support the legislation during 2022, using parliamentary tactics. Each attempt was rebuffed on party lines.
The EPA has proposed nearly quadrupling the social cost of carbon (SCC), a metric that the government uses to help determine the climate impacts of any given regulation, Fig. 5. The current figure, which has drawn legal challenges from Republican-led states, estimates that every ton of GHGs creates $51/ton of damages in 2020 and $85/ton in 2050. EPA proposes increasing the estimates to $190/ton in 2020 and $360/ton in 2050 – increases of 370% to 420%, more than they were in official estimates only 18 months ago.
The higher price would make it more difficult to justify numerous oil and gas projects. The increase derives from EPA using a lower discount rate, which implies that every ton of carbon produced today will do even more damage in the future.
However, reputable studies show that, with reasonable alternative assumptions about climate sensitivity and CO2 fertilization, the SCC declines to very low numbers, with a high probability of being negative through 2050. In other words, each incremental ton of CO2 may yield net benefits to society for decades to come.
The 8th Circuit Court of Appeals rejected an attempt from Republican-led states to block the Biden Administration’s use of the SCC. The states challenged the Biden Administration’s use of certain uniform values to estimate the SCC. However, the Court upheld a lower-court ruling against these states.
To demonstrate U.S. commitment to tackling climate change, the Biden Administration outlined at COP 27 (held in Egypt during November 2022) a renewed effort to reduce emissions from domestic O&G producers. Biden unveiled an updated proposal to regulate methane leaking from pipes and other equipment maintained by the U.S. O&G industry. The proposal would be the first time the federal government requires existing facilities to identify and remedy methane leaks.
This was not enough for environmentalists. The NewClimate Institute contends that methane emissions from the energy sector need to decrease 64% by 2030 for the world to meet the 1.5° Celsius target, and achieving that reduction requires natural gas use to decrease 26% by 2030. “Talking about emissions from venting and flaring misses the larger point: That O&G production needs to decline rapidly. There should already be no new investments in O&G production as of today. The U.S., as the world’s largest oil and gas producer, has a clear responsibility to lead the way.”
U.S. VS. GAS
The Department of Energy has issued a “Notice of Proposed Rulemaking” to ban the manufacturing of gas-fueled residential furnaces, Fig. 6. The types of furnaces that would be eliminated are the very common non-weatherized gas furnaces and mobile home gas furnaces that are atmospherically vented and used in most existing homes. By mandating a minimum gas-furnace efficiency of 95%, DOE’s proposal would force consumers to replace furnace combustion exhaust systems, because such efficiencies can be safely met only by totally different venting systems designed to handle internal condensation.
Several hundred comments were filed, many in opposition, making the following points:
- The proposed standard modification does not meet the “economically justified” criteria for prescribing new or amended standards.
- The SCC obscures regulatory costs.
- The proposed standards unjustifiably reduce consumer choice.
- The proposed standards are unnecessary, given the wide availability of condensing furnaces and their existing market penetration.
- The proposed standards do not meaningfully fulfill the intent of the Energy Policy and Conservation Act.
The comments contained numerous attachments to enable litigation. DOE is supposed to respond to all comments before issuing a Final Rule. And then comes a legal appeal under the Administrative Procedures Act. Then, all the details, along with whatever responses DOE provides, get litigated in court. This can take years.
FEDERAL CONTRACTORS TARGETED
The Biden Administration has proposed requiring the largest recipients of federal contracts to both set targets to reduce their GHGs and disclose how much they are contributing to climate change. Companies that receive $50 million+ in annual federal contracts would be required to set “science-based targets to reduce their GHGs.” They would also be required to publicly disclose the emissions contributed by their supply chains and caused by their products. Mid-sized contractors—those receiving $7.5 million to $50 million/yr.—would be required to disclose emissions resulting from their direct operations, but not their supply chain or products.
President Biden set a target for reducing U.S. GHGs by at least 50%, as of 2030, compared to 2005 levels and reaching “net-zero” emissions by 2050. He also has signed an Executive Order requiring the federal government to be carbon neutral by 2050 and reduce its emissions 65% by 2030.
The razor-thin Republican House majority must be the bulwark against two years of increasingly harmful federal policies for the O&G industry. Dissension among House Republicans will not be helpful in mitigating these policies.