Election Spotlight: Environment & Energy
By IBISWorld Analysts Antonio Danova & Lauren Setar
Growing awareness in the American public about energy and environmental issues has put related topics in the spotlight during election season, with each political party championing its own strategies for improving how the United States handles its environmental resources. Increasing demand for transportation and industrial production are driving up US consumption of oil and alternative energy, making these issues particularly pertinent to this election. Given the candidates’ differing positions, how would some key US energy and environmental industries be affected by a new term for President Barack Obama or by Republican candidate Mitt Romney stepping into office?
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Renewable Energies
Historically, the Democratic Party has focused on developing natural resources and investing in clean-energy solutions. The Obama administration has pushed for loan guarantees, cash grants and tax credits for the production of wind and solar power, as well as tax breaks for consumers who purchase hybrid and electric vehicles. The administration has also upped the Pentagon’s use of renewable energy through major purchase agreements for wind and solar power and biofuels. On top of that, it invested about $40.0 billion into clean-energy programs, including a $535.0-million loan guarantee to the solar panel manufacturer Solyndra. But in 2011, the company went bankrupt, bringing Obama under scrutiny for the funding decision and the company’s ultimate collapse.
Despite the Solyndra failure, Obama hopes to expand funding for new technology research during the next five years. He has proposed a “Clean Electricity Standard” that would require about 80.0% of electricity to be produced from zero-carbon sources, like wind and solar power, by 2035. Government funding for alternative energy projects would contribute to revenue growth for the respective industries and their upstream suppliers and downstream buyers.
The Republican Party, on the other hand, maintains that strict environmental standards hinder businesses and the free market; the party has historically supported reductions in environmental regulations. A Romney administration would fund governmental research on clean energy instead of interfering with the market by issuing loans directly to energy companies. His administration would seek to end direct assistance for clean-energy projects, causing industries like wind and solar power to have a slower pace of revenue growth. The administration would likely redirect a portion of the money toward governmental research programs, such as the Energy Department’s Advanced Research Projects Agency-Energy (ARPA-E). Obama has also made ARPA-E a priority, marking one area where the two candidates’ views overlap.
Contrary to Obama, Romney will likely focus on fossil fuels instead of renewable energy sources in his efforts to promote energy independence and create jobs. Additionally, a renewable electricity production tax credit is set to expire at the end of 2012. Although the Senate has passed an extension, the Republican-controlled house has not. Reinstating the full renewable electricity production tax would squeeze renewable energy producers’ profitability.
Wind & Solar
For the moment, the Wind Power industry (IBISWorld report 22111d) is growing quickly, with an estimated average annual increase of 19.5% in the five years to 2012. The $4.35-billion dollar industry has grown primarily due to the federal government’s production and investment tax credits as well as state government mandates for renewable energy. Under Obama, the industry would grow at an estimated 10.1% per year on average in the five years to 2017, with expected growth of 9.2% in 2013 alone. Under Romney, who plans to cut loan guarantees, cash grants and tax incentives, the industry’s revenue would likely grow more slowly.
Like the Wind Power industry, the Solar Power industry (22111e) has performed well in the five years to 2012, with revenue growing at an estimated annualized rate of 28.5% to $150.1 million in the five years to 2012, including 19.9% growth during 2012. Under Obama, funding for the Solar Power industry is expected to continue, contributing to average annual revenue growth of 7.0% in the next five years. This pace would likely to be slower under Romney since he would potentially cut direct funding.
Obama: Wind and solar power funding would continue on the same track as it has for the past four years, stimulating growth for wind power, solar powerand related industries.
Romney: Direct wind and solar power funding would likely end, causing wind and solar power industries’ revenue to grow at a slower rate. Trends in revenue would be determined by the level of funding to ARPA-E.
Nuclear Power
The Obama administration currently supports policies that would lead to an expansion of nuclear energy. The United States is the world’s largest producer of nuclear power and accounts for more than 30.0% of worldwide nuclear energy. Obama’s 2012 budget plans to give an additional boost to the Nuclear Power industry, setting aside $36.0 billion in government-backed loan guarantees for new nuclear reactors and more than $800.0 million for nuclear energy research. After 30 years in which few new nuclear reactors were built, a new nuclear power plant was approved in 2012 and is expected to enter service by 2017. Additionally, Obama’s Clean Energy Standard requires more electricity production to come from zero-carbon sources. These climate-change policies will lead to a boost in nuclear-energy production. The impact of Obama’s nuclear power plan will be small in the short term, however, because power plant development requires substantial capital and consideration for environmental safety, especially since the 2011 nuclear meltdown in Japan, making the entire process slow.
The Republican platform is also likely to push to expand nuclear power. Romney has promised to streamline licensing procedures for new nuclear reactors, which would allow projects with an approved design or projects neighboring existing facilities to be finished in no more than two years. Overall, the administration would allow the Nuclear Regulatory Commission to review and approve several types of nuclear reactors more quickly. By instating shorter approval times and addressing other nuclear power industry problems, Romney’s plans are expected to lead to a more rapid expansion for this industry than is projected under Obama’s policies.
During the past five years, the Nuclear Power industry (IBISWorld report 22111b) has grown at an annualized rate of 2.7% to $33.3 billion. Under the Obama administration, revenue for the industry is expected to grow at an average annual rate of 3.3% over the five years to 2017. If Romney takes office, the industry would likely grow at a quicker pace over the same period.
Obama: Nuclear power funding would continue as it has for the past four years, helping keep industry growth steady
Romney: Nuclear power plants with certain specifications would be built more quickly, bolstering industry growth
Fossil Energies
Despite a growing focus on renewable energies, fossil energies such as crude oil, natural gas and other carbon-based fuels still garner considerable political attention from both Democrats and Republicans.
The Democratic Party has come to favor a balanced energy policy supporting the use of domestic energy commodities like natural gas and crude oil, but with heavier promotion of developing affordable, green energy sources. The party has also historically been a proponent of energy independence, attempting to minimize US reliance on foreign oil. In early 2012, the Obama administration released the “All-of-the-Above Approach to American Energy,” outlining the President’s continued plan of reducing the country’s dependence on foreign oil, bringing down gasoline prices and making the United States a global leader in clean energy.
To kick-start his approach, Obama updated the Corporate Average Fuel Economy (CAFE) standards in 2011 to work toward doubling the fuel efficiency of all vehicles by 2025, cutting oil consumption for vehicle fuel by 12 billion barrels by 2025. To further reduce the need for imported oil, the Obama administration has also already increased domestic oil production by approving the quadrupling of the number of operating oil rigs in the United States. With this plan, according to data from the US Energy Information Administration, roughly half of the crude oil that the United States consumes will be domestically produced by 2020.
The Republican Party, too, has historically been committed to a national energy policy that promotes increased domestic supplies of oil and natural gas, typically providing tax incentives to spur production. In keeping with his party’s historical platform geared toward heavier use of domestic resources, Romney hopes to leverage the country’s rich oil and natural gas reserves. He intends to enlist the Department of the Interior to take an inventory of all of the nation’s oil and gas resources. Romney also promotes drilling off the Alaskan and Pacific coasts and is a proponent of hydraulic fracturing, or “fracking,” a controversial method of extracting natural gas from shale deposits.
Oil Drilling and Gas Extraction
The Oil Drilling and Gas Extraction industry (IBISWorld report 21111) has been on a steady upward trend over the five years to 2012, with industry revenue growing at an annualized rate of 3.1% to $345.9 billion. Growth within the industry has been backed primarily by the steadily improving global economy as emerging countries increase their demand for oil and natural gas. This increased demand has flowed through to expand prices of US crude oil, boosting revenue in the process. Under another term with Obama, revenue for the Oil Drilling and Gas Extraction industry is expected to grow 5.9% in 2013, with average annual growth of 3.5% expected during the five years to 2017.
If Romney is elected, the Oil Drilling and Gas Extraction industry could experience more rapid growth. The key difference between the two candidates regarding this industry is Romney’s support of the Keystone XL Pipeline project, an endeavor that would ultimately open up more room for oil drilling and gas extraction. Both candidates call for less dependence on foreign oil; however, Romney’s stances may stand to benefit the Oil Drilling and Gas Extraction industry further because of strategies geared specifically toward drilling and fracking.
Obama: A heavier focus on incentives for renewable energies may take away from industry growth potential. A push for independence from foreign oil could benefit industry operators.
Romney: Drilling and fracking strategies would increase production. Shifting away from the country’s dependence on foreign oil, like Obama’s strategy, would benefit oil extraction firms.
Natural Gas Distribution
Unlike natural gas extraction firms, natural gas distributors bore the brunt of the recession’s effects. As a result of reduced downstream demand during the downturn, industry revenue was cut severely. Thus, despite a strong postrecession performance, industry revenue is expected to fall on average 2.2% per year to about $127.6 billion over the five years to 2012. To top off the drop in demand, recent discoveries of the fossil fuel in shale rock at the foot the Appalachian Basin have kept prices down in light of the prospect for a greater supply. Nevertheless, gas distributors stand to benefit during the next five years from increased consumption in residential and commercial sectors, higher consumer spending and growth in industrial production. Growing concerns about greenhouse gas emissions may also drive up demand for natural gas electricity generation, since natural gas is generally more eco-friendly than other electricity sources, such as coal. IBISWorld expects that, with Obama’s current policies in place, revenue for the Natural Gas Distribution industry (22121) will grow swiftly over the five years to 2017 at an annualized rate of 6.7% to about $176.2 billion.
On the other hand, by promoting fracking and other high-volume drilling methods, Romney’s plan may drive natural gas prices down further, a trend that could squeeze profit margins and ultimately subdue the true growth potential of the industry. Nonetheless, the industry’s growth potential primarily hinges on the level of downstream demand for natural gas, which is expected to grow over the next five years. Growth in demand for natural gas will ultimately offset a price fall, yielding strong growth.
Obama: The promotion of natural gas as a primary electricity generation source will benefit natural gas distributors.
Romney: High-volume activity from natural gas extraction forces distributors to offer lower prices, slowing revenue growth potential and possibly cutting into profitability.
Conclusion
Oil demand in the United States will rise following increased demand for transportation and industrial production. Overall, Americans’ increased environmental awareness has stressed the importance of fossil fuels and renewable energy during election season. As a result, the spotlight is on Republicans’ and Democrats’ respective approaches to all environmental matters.
Wind power, solar power, nuclear power, oil drilling and gas extraction, and natural gas distribution are all expected to perform well in the next five years; however, some industries are expected to outperform others. For example, the Wind Power industry is expected to grow at an average annual rate of 10.1% to $7.0 billion in the five years to 2017, a higher growth rate than the other four industries. Continued focus on energy self-sufficiency and reducing greenhouse emissions under Obama is expected to drive this industry’s growth. The Oil Drilling and Gas Extraction industry is expected to grow much less quickly, with an average annual growth rate of 3.5% in the five years to 2017. The industry’s performance hinges on oil and gas prices, which are projected to increase on the back of sustained global economic growth from developed and emerging economies. However, Romney as president may speed up oil drilling and gas extraction by decreasing restrictions for fracking and other extraction techniques, which may ultimately drive down price.
Overall, both candidates support using a mix of fossil fuels and renewable energies, but with varying approaches. And although both candidates have proposed ideas, Congress will ultimately determine whether or not bills will pass. The House and Senate are likely to remain divided, making the passage of legislation difficult for either party. Nonetheless, IBISWorld risk scores for the Wind Power, Solar Power, Nuclear Power, Oil Drilling and Gas Extraction and Natural Gas Distributors industries will still be affected by a new president and his fresh platform regarding energy and the environment.
To download full research reports for the industries discussed in this article, click on the report titles below.
Wind Power, Solar Power, Nuclear Power, Oil Drilling and Gas Extraction, Natural Gas Distribution
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