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Morningstar Views: How the Upcoming Election Will Shape Regulation

When it comes to regulation, the contrast is clear: With a second term for the Trump administration, the rollback of regulatory restrictions would generally continue. A Biden administration would look to quash many of the deregulation efforts that have been made under Trump.

Plenty of industries would feel the impact of ramping up regulation or scaling back. But one industry the Biden-Harris campaign proposed rolling back restrictions on would create major momentum for a budding industry: cannabis.

Growing Cannabis After the Upcoming Election


Sen. Kamala Harris (D-Calif.) recently pledged to help decriminalize cannabis. If a Biden Administration is elected and this campaign promise becomes policy, motivation for further easing the federal prohibition could follow.

Loosening restrictions would help the cannabis industry mature. Banks and other ancillary services have stayed away from servicing cannabis companies owing to legal risk. These companies’ stocks are currently limited to trading on the over-the-counter market and Canadian exchanges. Decriminalization could prompt U.S. markets to allow these stocks to trade on U.S. national exchanges. This change would allow cannabis companies greater access to the capital markets for growth.

Now, many institutional investors are precluded from investing in over-the-counter stocks because they lack sufficient liquidity. But with this potential catalyst on the horizon, those same investors are beginning to do their homework, so that they will be ready to go when cannabis stocks move to an exchange.

The Future of Fracking and Electric Cars


Under a Biden administration, we expect many climate change policies will be implemented that would present headwinds to the U.S. oil industry. However, even after incorporating those changes into our supply and demand analysis, we continue to think the energy sector is undervalued.

 Among the policies that we expect from a Biden administration, there will likely be a reset that would include re-entering the Paris Agreement, reversing Trump-era policies, and halting permitting for drilling new wells on federal land.

While the federal government can stop the permitting needed to allow new drilling on federal land, it can’t ban fracking on private land, where most shale oil firms operate. If there’s a ban on permitting on federal land, we don’t expect a significant impact in our supply and demand analysis.

Congress could pass a new law to ban fracking, but we think that would be highly unlikely for two reasons. Biden has stated that he would not look to ban fracking outright. And banning all fracking would severely cut employment within the energy industry and among its suppliers as well as increase the cost of oil, which in turn would have a negative impact on the economy.

Vehicle fuel efficiency standards would likely be increased along with policies to build out charging station infrastructure nationwide. A Biden presidency could also provide financial incentives for the transition to electric vehicles. Our current forecast for the percentage of new U.S. vehicle sales that are electric or hybrid is 15% and 25% in 2025, respectively. Under a Biden administration and Democrat-controlled Senate, we would increase those percentages to 25% and 35%, respectively.

Yet, even in the Biden scenario, we forecast that U.S. gasoline demand would decline by only 3% by 2025 and by 9% in 2030 as compared with our base case. U.S. gasoline demand accounts for only a third of U.S. crude consumption, which equates to only a 1%-3% decrease in U.S. crude oil demand, globally, U.S. crude oil demand is only 20% of global demand.

The increase in electric and hybrid vehicles will also provide a boost to the lithium industry. We forecast that lithium demand will grow more than 6 times from around 300,000 metric tons in 2019 to roughly 1.9 million metric tons in 2030.

A Biden administration will need to be judicious as to how much and how rapidly to implement proposed changes. If they move too rapidly, the changes could quickly drive up fuel prices and hamper economic growth, as well as increase the amount of imported oil and increase the country’s reliance on foreign suppliers.

Renewable Energy Build-up

No matter who wins the election, renewable energy will continue to grow as a percentage of electricity production and will become the second-largest source of power generation in the U.S. by 2030, according to our forecasts.

As a percentage of power generation, coal has been declining over the past two decades and will continue to do so. There are no new coal plants being built in the U.S. currently, and hundreds have been retired or will be retired in the coming decade. We forecast that growth of renewable power will increase 8% annually based on renewable energy policies as dictated at the state level as the primary growth driver as opposed to federal regulation.

The Trump administration has largely stayed out of the way and has allowed the trend toward renewable power to play out. Biden’s energy platform calls for the U.S. to reach net zero emissions by 2050, but the majority of U.S. utilities has already made this pledge.

Among those utilities companies whose long-term outlook will be constrained by the trend toward renewable energy are those that are unregulated. In particular, those with a heavy reliance on legacy fossil fuel or nuclear power generation could face margin pressure as low-cost renewable energy increases its share of wholesale power markets.

What Investors Should Know


The implementation of the key priorities of the next administration will certainly have an impact on the valuation of firms that are directly affected. Until Election Day, investors should take into consideration the potential impact to the companies they invest in. While it may be prudent to evaluate making a few modest changes in your portfolio, we recommend focusing on your long-term investment goals

 


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