US rejoins Paris Agreement and cancels Keystone XL pipeline

Joe Biden wasted no time after his inauguration as US President, reversing a number of former President Trump policies and signing an executive order to begin the 30-day process of rejoining the 2015 Paris Agreement.

Biden has pledged to make the fight against climate change a top priority of his administration. Within hours of his inauguration, Biden issued 17 executive orders. First and foremost, Biden is rejoining the Paris Agreement, and the US will once again become a formal party to the global climate negotiations in 30 days. Ahead of the COP26 conference in November in Glasgow, the new US administration will have to define plans on how to cut emissions by 2030.

The move is welcomed by climate change leaders and campaigners, who want to see an ambitious US commitment to cut emissions this decade and a strong diplomatic push to encourage other countries to do the same.

Keystone XL pipeline cancelled
Biden also rescinded the permit for the controversial Keystone XL pipeline. Work on the 1,900 km pipeline – which was to carry 830,000 b/d of oil from Alberta, Canada, to the US state of Nebraska, from where it would be distributed via the existing pipeline network to refineries in the Gulf of Mexico – had been halted under previous US President Barack Obama in 2015. It was subsequently restarted in 2019 by President Donald Trump. Environmentalists and Native American groups have been fighting the project for more than a decade.

Moratorium on Alaskan drilling
The new US President also put in place a temporary moratorium on drilling for oil and gas in Alaska’s Arctic National Wildlife Refuge (ANWR) and reinstated an Obama-era policy to close most federal offshore waters in the US Arctic and Northern Bering Sea to oil and gas exploration.

US-China relations
Meanwhile, with different countries and industries jockeying for relief from tariffs, and with Biden saying that trade talks will take a ‘backseat’ to a domestic recovery, changes to tariffs and overall US policies in relation to China are expected proceed somewhat slowly. These tariffs serve as a key bargaining chip with China, and market watchers believe it is unlikely that Biden will simply give them up easily without concessions. Therefore, although it is expected that Biden will ultimately veer towards cancelling the tariffs, the impact is likely be delayed to as late as 2022.

A full cancellation of tariffs between the US and China would increase maritime oil demand by approximately 300,000 b/d, according to Rystad Energy.

‘Biden boost’ for oil products
After a devastating 2020, Rystad Energy projected demand for oil products in the US to grow by 1.08mn b/d in 2021 to 19.1mn b/d. This projection left politics aside, but if President Joe Biden lives up to his promises after his inauguration, the market analyst expects to see an upside to US products demand of about 350,000 b/d as a result of the planned short-term economic stimulus and his infrastructure plan.

‘These measures present a very bullish cocktail for US products demand in 2021. This infrastructure spending will certainly stimulate demand for oil in the short term because of increased construction activity, as well as in the medium term due to more efficient ports, bridges and roads that will enhance economic activity and passenger vehicle usage,’ says Chris Page, Oil Markets Analyst at Rystad Energy.

The final details of Biden’s stimulus plan will be subject to negotiations in Congress. However, assuming that Congress approves the short-term aid in February, Rystad Energy expects to see an upside to US oil products demand of approximately 285,000 b/d for 2021.

When it comes to the separate infrastructure spending in particular, it expects that the funds will be spread out over the course of 24 months, as was the case with the 2009 stimulus, and thus it will take some time for this spending to fully translate into increased oil demand. Accordingly, the demand impact from these projects is forecast to be marginal in 2021, at approximately 60,000 b/d, before rising in 2022 to 330,000 b/d as much of the construction and impacts of the projects begin.

Some of this infrastructure spending is expected to be directed towards creating ‘green jobs’ or projects that seek to limit future carbon emissions. Nonetheless, Rystad Energy believes that Biden’s team will need to tread carefully to avoid losing the senator votes whose states rely heavily on fossil fuel production.

Fuel economy standards
Biden’s election also brings an end to Trump’s plan to decelerate proposed fuel economy increases from 2022 through 2026, from Obama’s standard of 4.7%/y to only 1.5%/y. However, there are reasons to doubt that Biden will immediately revert back to the Obama-era standards, notes Rystad Energy. To start with, the US auto industry has been hit hard by the pandemic, with sales falling by approximately 15% year-on-year to between 14.4-14.6mn vehicle sales in 2020. Automakers may lack the R&D and marketing funds to achieve the Obama-era standards by as soon as 2022.

Also, amid cheaper prices for gasoline, Americans appear to be gravitating towards light duty trucks, with such vehicles comprising 56% of vehicle sales in 2019, leading to a year-on-year decline in fuel economy. This lack of interest in sedans and other more fuel-efficient vehicles may make compliance with aggressive fuel economy standards (which involves purchasing credits from electric vehicle manufacturers like Tesla) much more costly for manufacturers.

Therefore, Biden is expected to adopt the deal that California struck with several major automakers to increase fleet-wide efficiency to 51 mpg (versus 54.5 mpg under Obama and 40.4 mpg under Trump). Given that several major auto manufacturers have already agreed to (and theoretically likely have begun preparing for) these rules, this could be an easy way for Biden to strike a compromise early on, while still achieving significant efficiency gains.

A full return to Obama-era standards would lead to approximately 500,000 b/d in lower oil demand by 2025, suggests Rystad Energy. Under the California deal, it predicts that the impact on oil demand would fall to approximately 370,000 b/d. For 2025, at the moment it forecasts that the US will consume approximately 20mn b/d of oil products.

Figure 1: Biden administration impact on US oil products demand
Stimulus and infrastructure plan impact in mn b/d; Total medium-term impat in ,000 b/d
Source: Rystad Energy