Could the U.S. election unplug or charge up the energy transition? 

 Rick de los Reyes

Well, as you've probably gathered, I think economics and innovation will be the ultimate drivers of the energy transition, more so than politics.

Ritu Vohora

Welcome to “The Angle,” where we seek sharper insights on the forces shaping financial markets. I'm your host, Ritu Vohora, global capital markets investment specialist at T. Rowe Price Associates here in London. Energy policy has long been a political football in the U.S. Joining me to help sort the signal from the noise are Gil Fortgang and Rick de los Reyes.

Rick is portfolio manager and our head of Commodities. Gil is a Washington analyst covering regulatory and legislative policy for T. Rowe Price Investment Management. Welcome. It's great to have you both back on “The Angle.”

Rick de los Reyes

Thanks a lot, Ritu. It's great to be here, and it's great to be back on “The Angle.”

Gil Fortgang

Pleasure to be here.

Ritu Vohora

Thanks, both. So, when it comes to energy, both candidates have starkly different priorities. Reducing carbon emissions and developing America's green economy were key objectives in the Biden-Harris administration. Donald Trump, on the other hand, has highlighted his commitment to more traditional U.S. energy sources. So, let's start with you, Rick. Where do these priorities have the potential to translate into meaningful changes in energy policy?

Rick de los Reyes

Well, that's a great question, Ritu—I appreciate you asking it. And I'm going to start by actually not exactly answering your question.

Ritu Vohora

[Laughter] That's a politician's answer and, I guess, a fitting way to start a podcast about the U.S. election.

Rick de los Reyes

Exactly. Well, believe it or not, history would tell you that it actually hasn't made much of a difference which party controls the presidency. If I were to show you a chart of drilling permits granted on federal lands every year for the last few decades, you wouldn't be able to tell whether there was a Democrat or a Republican in the White House.

So as much as Republicans talk about “drill, baby, drill,” and as much as Democrats talk about eliminating fossil fuels altogether, the reality is that not much really changes. In fact, if you were to look at the history, you would see that the big growth in U.S. oil production happened during the Obama administration.

It was during that time that U.S. oil production more than doubled. And it was during that time that the U.S. also became the largest oil producer in the world, overtaking Saudi Arabia and Russia. The reason that happened actually has nothing to do with politics; it has everything to do with technology. It was the advances in shale technology during that time that allowed oil producers to extract resources that were previously considered inaccessible.

The efficiencies gained from these technologies have really been quite remarkable. In fact, now, if you look, you'll see that capital spending by U.S. oil and gas producers peaked about a decade ago and is lower now than it was then. And yet we're on track to produce a record amount of oil in the U.S. this year.

So that just shows you the industry's ability to do more with less, thanks to innovation. And that's far more important than who controls the White House.

Ritu Vohora

Okay. Thanks for that, Rick. You’re right that didn't answer my question. But it's certainly helpful context for me and, I'm sure, our listeners, too. So, Gil, let's bring you into the conversation, and perhaps we could get a more direct answer from you. Could you shed some light on where we might see a meaningful change in energy policy?

Gil Fortgang

I can try my best. I think the market is worried about what could happen with the IRA, or the Inflation Reduction Act. This legislation was passed during President Biden's second year in office, and it mostly uses direct payments and tax credits to promote the greening of U.S. industry over the coming decade. Many of those tax credits are what's called uncapped, or don't have a limit on the amount of funding.

So the law has potential to drive significant spending over the next decade on green tech. I think a Harris presidency would provide clarity on support for things like electric vehicles and renewables and, and the gamut of clean energy technologies.

The outlook for the IRA, I think, would be a bit more uncertain if Trump were to win the election. He and other leading Republicans have been quite critical of the law.

Ritu Vohora

So there could be more uncertainty for the IRA in a Trump administration. In fact, in our previous episode on fiscal policy, our U.S. economist, Blerina Uruçi, mentioned that cuts to the IRA might be viewed as a way to offset some of the deficit spending that would come

from extending the Trump tax cuts. Gil, you're on the ground in Washington—what would be the mechanism for changing the IRA if Trump did win the election?

Gil Fortgang

So first, it's not just about the presidency. The makeup of the Senate and House of Representatives is also important. Republicans would need to control both chambers of Congress for repealing the IRA to be in the realm of possibility. Even then, it might be difficult. Would the votes be there for a full repeal? Many of the states represented by Republicans have benefited from IRA-related projects.

Ritu Vohora

Yeah, indeed. I've seen analysis on this that energy tax credits have actually spurred innovation. They've incentivized both investment and manufacturing as well as actually helped create jobs in many of these districts. And I think, Gil, you made a really important point that all eyes are on who wins the presidential race, but actually to achieve their policy goals, who controls Congress matters.

So given all of that, you know, an all-or-nothing repeal of the IRA isn't the only option, right? With a Trump presidency, could he scale back certain elements?

Gil Fortgang

I think that's correct. Republican control of both congressional chambers could open the door to doing away with parts of the IRA through something called budget reconciliation. This streamlined legislative process requires only a simple majority to pass in the Senate. There's also the potential for executive action. As president, Trump could limit or expand access to certain programs by directing the federal agencies implementing the law to revise their guidelines.

Ritu Vohora

Could you share an example?

Gil Fortgang

Yeah. So, one example could be requiring higher levels of U.S. content in electric vehicles, which could make the consumer tax credit a little bit harder to claim.

Rick de los Reyes

So, Gil, what parts of the IRA do you think could be at risk in a Trump administration?

Gil Fortgang

Yeah, it's a great question. Trump's comments in interviews and speeches have prompted the market and media to focus on the risk to consumer tax credits for electric vehicles and subsidies for renewable energy.

But rhetoric on the campaign trail doesn't always translate into action, especially if it involves legislation. That caveat applies equally to Democrats and Republicans. Bottom line: There's a lot of uncertainty, but the possibility of changes to the IRA, or how it's implemented, will be important to watch.

Ritu Vohora

Okay, so it sounds as though there could be a lot of noise around the IRA, depending on which candidate wins. Now, of course, beyond the IRA, there's also the regulatory implications. In a Harris victory, we could see a continuation, from the administration with renewed regulatory pressures to limit oil and natural gas, whereas in a Trump victory, we could see a relaxation on the burden for oil and gas development or possibly even reversal of limits on greenhouse gas emissions.

Now, another area of focus is the electrical vehicle industry, or EVs. This has really been a punching bag of Trump's campaign. So, Rick, let's put these policy risks in a broader context.

Rick de los Reyes

Sure. Happy to do that. Look, I would say the, the tax credits have definitely made EVs more affordable. They've definitely helped the adoption in the short term. But ultimately, I think it's the economics that are going to win out. As new producers scale up, as the technology improves, as competition increases, prices for EVs are going to just naturally decline.

Keep in mind, there's another factor that's holding back EV adoption and that's range anxiety, right? That's the fear of running out of juice while you're out on the road. And then the lack of charging stations.

Ritu Vohora

That's definitely one of my concerns.

Rick de los Reyes

Yeah. Same here. Look, we have two EVs in my family, so I can confirm that range anxiety is definitely a real thing. But look, I also think that that's a problem that goes away over time. Improved battery technology is going to increase the range of those vehicles, and we're going to have more and more charging stations built.

Ultimately, I'm one of these people who just thinks that EVs are better cars. Like I said, I have two of them. And I think eventually everyone's going to drive them. I just think that it's going to take time.

Ritu Vohora

Well, EVs may be the face of the future, Rick, but I'm not sure everyone will agree with you on that. Gas cars certainly appeal on both sound and power.

Rick de los Reyes

No, look and, and full disclosure here, I do still have one gas-powered vehicle as well, so my household is not completely dependent upon EVs. I would agree that I think it's going to take time before everybody can completely transition to EVs. But, you know, in terms of disagreement about that and the political rhetoric around it, I would just emphasize what Gil said earlier about how the rhetoric on the campaign trail just doesn't always translate into action.

And I would point out that Elon Musk and President Trump seem to be forming a friendship. So, I think there's clearly some uncertainty about what would really happen with the IRA’s EV subsidies, even under a Trump administration.

Ritu Vohora

So tax credits can help with EV adoption, as you've outlined, but there are also other drivers over the long term—manufacturing scale, innovation, and, as you said, charging infrastructure—that'll be very important. How about renewable energy?

Rick de los Reyes

Yeah. So with renewables, I think tax credits definitely make them more compelling on the cost front as well. However, look, even without subsidies for solar and wind, I think that they're able to be cost competitive or, in some cases, even less expensive than conventional power plants over time.

Renewables don't have the recurring fuel costs that you have with, say, coal or a gas-fired power plant, right? If they're relying on sun and wind, sun and wind are free. The issue you get in then is with the intermittency problem that you have with solar and wind energy. And that's really what prevents them from being a bigger part of our electricity consumption already, right? In order for solar energy to work, the sun needs to be shining. In order for wind to work, the wind needs to be blowing—and that's not always the case. And so, we're still reliant upon other sources of energy to form that baseload power. And in most cases right now that's going to be natural gas. We're phasing out coal, so it's not going to be coal. Nuclear seems to be having a renaissance, but that's going to take a while to build.

The thing to keep in mind here is that we, we are seeing retirements of some of the older gas and coal plants, and that's reducing the supply of baseload power. So, we're going to need new capacity. That new capacity is coming, but it's going to take time, cause, particularly in gas, there's a really long order backlog for gas turbines right now for gas-fired power plants.

Ritu Vohora

Yeah, and, Rick, what about electricity demand? You know, artificial intelligence is incredibly energy intensive. And based on data that I've seen from the EIA and, for our listeners, that's the Energy Information Administration, one AI GPU, or chip, uses the equivalent of one U.S. household's energy consumption in a day. That is huge.

Rick de los Reyes

That's a great point, Ritu. We're seeing electricity demand in the U.S. increase now for the first time in decades. We went a long period with actually very flat electricity demand in the U.S. In many ways, that was because of the efficiency of our use of electricity. But the build out of data centers for AI—along with some of the sort of resurgence in, in manufacturing activity that you're seeing in the U.S.—all that is really requiring more electricity.

And the important part of that is to keep in mind that that demand is really for always-on power. Data centers, they need to run 24 hours a day. And so this once again gets back to the point that renewables can be part of the solution, but we're going to have to build more gas-fired power capacity as well in order to form that baseload power so that these things can run for 24 hours a day.

I think the real game changer for renewables adoption would be advances in energy storage. If we can store wind and energy power and have the technology to do that, then, then we're able to use wind and solar power even when the wind isn't blowing and the sun isn't shining.

When it comes to that storage technology, I would say progress is definitely being made, but, really, commercially available solutions just aren't there yet.

Ritu Vohora

Yeah, I think that's a really important point. So it sounds like, you know, potential growth in U.S. power demand will be a very important trend to watch, along with, of course, energy storage. So, Rick and Gil, it's been a great conversation. But, before I let you go, let's circle back to the title of this episode: Could the election unplug or charge up the energy transition?

Gil Fortgang

My answer is neither. I think a complete repeal of the IRA would be a setback. I think a partial repeal would also be a bit of a headwind. And I think, obviously, keeping the IRA intact would give the energy transition some momentum. The law contains a lot of support for emerging technologies that, over the long term, could be very important in reducing carbon emissions—for instance, carbon capture, clean hydrogen, and the energy storage solutions that Rick mentioned.

Rick de los Reyes

Well, as you've probably gathered, I think economics and innovation will be the ultimate drivers of the energy transition, more so than politics. So, so I think that transition should continue regardless of the outcome of the election. Now, that said, there's no question that government policy can help add momentum to that process, and the IRA has had an impact. So, I would say the election shouldn't change the direction of travel, but it could change the speed of travel.

Ritu Vohora

Okay. Well, I think that's a great way to conclude our podcast today. Thanks, Rick and Gil, for your insights.

Rick de los Reyes

Thanks, Ritu. It was a great discussion. It's always fun to be here.

Gil Fortgang

Thanks for having me.

Ritu Vohora

Great. Well, as the old adage goes, a week is a long time in politics. As we count down to November's election, the outcome remains uncertain. And no doubt, we'll see continued political twists and turns. But to your point, Rick, there will be many other factors driving various sectors, and what's happening in the economy will be just as important, if not more, than what's happening in the White House.

Thank you for listening to “The Angle.” We look forward to your company on future episodes. You can find more information about this and other topics on our website. Please do rate and subscribe wherever you get your podcasts. “The Angle”: better questions, better insights—only from T. Rowe Price.
 

Disclosure

This podcast is for general information and educational purposes only, and outside of the United States is intended for investment professional use only.

It does not constitute a distribution, offer, invitation, recommendation, or solicitation to buy or sell any securities in any jurisdiction, or to conduct any particular investment activity.

This podcast does not provide investment advice or recommendations, nor is it intended to serve as the primary basis for an investment decision.

Prospective investors are recommended to seek independent legal, financial, and tax advice before making any investment decision.

The views contained herein are those of the speakers as of the date of the recording and are subject to change without notice. These views may differ from those of other T. Rowe Price companies and/or associates. Information is based upon sources we consider to be reliable; we do not, however, guarantee accuracy. There is no guarantee that any forecasts made will come to pass.

This podcast episode was recorded in September 2024.

Publications referenced in this podcast include:

• “Oil and Gas Statistics, Fiscal Year 2023,” U.S. Bureau of Land Management, 2024. 
• “Statistical Review of World Energy 2024,” The Energy Institute, 2024. 
• U.S. oil and gas capital expenditure data from Bloomberg Finance L.P., 2024. 
• “H100 Tensor Core GPU Product Specifications,” NVIDIA, 2024. 
• “How Much Energy Does an American Home Use?,” Energy Information Administration, 2022.

This podcast is copyright 2024 by T. Rowe Price.

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