Biden's energy sector: what threatens Russia from the US green course

Forbes has published a column, titled “Biden's energy sector: what threatens Russia from the US green course” by Marcel Salikhov, President of the Institute for Energy and Finance Foundation.

The restrictions on shale production, introduced by the new US president, will lead to an increase in oil prices, which is beneficial to Russian exporters and the budget. In the long term, the US emphasis on green energy would seem to lead to a decrease in demand for Russia's main export commodity. In fact, there is no need to expect radical changes, Marcel Salikhov, President and Head of the Economic Department of the Institute for Energy and Finance, says.

Limited offer

Immediately after taking office, Joe Biden, as promised, began to reshape energy policy. The obvious and expected consequence of the new course will be an increase in oil prices. There are several reasons for this. First, the administration plans to introduce, in one form or another, an analogue of the carbon tax on mining operations. This will inevitably increase the cost of producing oil and gas in the United States. In addition, the authorities are going to cut subsidies to commodity companies, which will also lead to an increase in their costs. According to OECD estimates, subsidies now amount to $ 15-16 billion annually, and about half are received by producers of oil and petroleum products.

Secondly, an important element of Biden's policy is the anti-crisis package of economic support, which includes direct payments to citizens, aid to states budgets and other social measures. A further increase in government spending in the United States will lead to an expansion of aggregate demand and additional growth in the consumption of petroleum products. On the other hand, spending will result in an increase in the budget deficit, which will play in favor of a weakening dollar. Thus, the short-term consequences of Biden's policy can be thought of as limiting the supply of energy resources while stimulating demand for them. All of these are inflationary measures that will further increase prices.

Balancing sanctions

Realizing the implications of its policy for the oil market, the new administration also took care of how to mitigate the possible negative effect. Namely in this context the change in foreign policy strategy should be viewed. Biden announced that he could go to the lifting of sanctions on Iran's oil industry. Back in 2018, Iranian oil exports reached 3 million barrels per day, but at the end of 2020 did not exceed ¬0.4-0.6 million barrels per day. Iranian authorities have promised to restore production to its previous level "in a few months." However, after the conclusion of the nuclear deal in 2015, the sanctions were already lifted, and then it took Iran about a year and a half to noticeably increase production (by 0.5 million barrels per day). And the very return to the deal will require the approval of Congress and coordination with allies, especially with Israel. Therefore, significant volumes of Iranian oil on the market can be expected no earlier than 2022.

On the other hand, there is the topic of new US sanctions against Russia, including over the case of Alexei Navalny. Really tough sanctions could devalue Russian exporters' gains from high oil prices. However, Biden's foreign policy, judging by the first steps, is pragmatic. The American authorities are even ready to discuss the lifting of sanctions against Nord Stream 2, if certain conditions are met. For Biden, it is extremely important to restore relations with a key strategic partner - the EU. This is more important than sanctions against a separate project, even if this way it is possible to support the export of American LNG to Europe.

Long-term consequences

The new administration has to rely on the same tools that Trump used - executive orders, which the next head of state could easily reverse. Democrats have only a slight edge in Congress, making radical reforms less likely. And yet, one must take into account the scenario in which Biden's decisions will form the basis of a long-term course.

The climate agenda is becoming an important policy element. The United States has returned to fulfilling the terms of the Paris Agreement, from which it withdrew under Trump. But here, too, the consequences will not be as radical as it seems now. For example, in order to reduce greenhouse gas emissions, the United States must first decommission coal-fired power plants as the dirtiest. Coal generates 23-24% of electricity in the country, and although this share is falling, coal is still in second place after natural gas. At the same time, the coal lobby in the United States is quite strong, and while Biden's plans do not directly affect the interests of the industry, coal miners, like oil companies, face only a partial reduction in subsidies.