Our analysts Ariana Salvatore, Stephen Byrd and Devin McDermott
discuss President Trump’s four executive orders around energy
policy and how they could reshape the sector.
----- Transcript -----
Ariana Salvatore: Welcome to Thoughts on
the Market. I'm Ariana Salvatore, Morgan Stanley's U.S. Public
Policy Strategist.
Stephen Byrd: And I'm Stephen Byrd, Morgan
Stanley's Head of Research Product for the Americas and Global
Head of Sustainability Research.
Devin McDermott: And I'm Devin McDermott,
Head of North American Energy Research.
Ariana Salvatore: Our topic today looms
large in investors minds. We'll be digging into how the new
policies proposed under President Trump's administration will
fundamentally reshape energy markets.
It's Tuesday, February 4th at 10am in New York.
On his first day in office, President Trump declared a national
energy emergency. He issued four key executive orders, setting
out a sweeping plan to maximize oil and gas production. All of
this on top of stepping back in tangible ways from the Biden
administration's clean energy plans. We think these orders can
have a significant impact on the future of energy, one of Morgan
Stanley's four key themes for 2025.
So, Stephen, let's start there. One of the biggest questions is
which segments of the power and AI theme stand to benefit the
most, and which ones will be the most challenged?
Stephen Byrd: Yeah, Ariana, I'd say the two
biggest beneficiaries will be natural gas and nuclear, probably
in that order. And in terms of challenges, I do think, wind,
especially offshore wind, will be quite challenged. So, when I
think about natural gas, it's very clear that we have an
administration that's very pro natural gas.
And natural gas is also going to need to be part of the power mix
for data centers. It's flexible. It could be built relatively
quickly. There are a lot of locational options that are perfect
here. So, I do think natural gas is a winner.
On nuclear, we do think Republicans broadly, and also many
Democrats, firmly support nuclear power. Nuclear is quite
helpful, especially for larger data centers or supercomputers.
They're large, there's a lot of land at these nuclear plants. And
so, I would expect to see some very large data centers built at
operational nuclear plants. And we do think the Trump
administration will work hard to make that – from a regulatory
point of view – make that happen.
I also think we'll see a lot of support at the federal level for
new nuclear power plant construction, as well as bringing the
U.S. nuclear fuel cycle back to the U.S. So those are a few
of the areas that I would expect to do well.
Ariana Salvatore: Devin, same question for
you on the energy sector. How are you thinking about the impacts?
Devin McDermott: Yeah, it's a good
question, and there's a lot in these executive orders. I mean,
some of the key things that we're focused on as impacting the
sector include encouraging federal lands development and leasing
for oil and gas activity, with a specific focus on Alaska.
Resuming LNG permit authorizations, which lifts the ban that's
been in place for the last year. Eliminating EV targets,
including pausing some IRA funds tied to EVs. Broad support for
infrastructure permitting, including pipelines. And then a
broader review of environmental regulations, including some
recent headlines that point to rolling back fuel efficiency and
emission standards for cars and trucks – something that the prior
Trump administration did as well.
The near-term financial impact to the industry of all this is
fairly limited. But there are two key longer-term considerations.
First, on the oil side, rolling back fuel efficiency standards
and other environmental regulations doesn't stop the transition
to lower carbon alternatives, but it does slow it. And in
particular, it moderates the longer-term erosion of gasoline and
diesel demand; and creates a backdrop where incumbent energy
players have a longer runway to harvest cash from these legacy
businesses and time to scale up profitable low carbon growth,
which is still progressing, despite the policy changes.
And then second, gas is the biggest winner, building on some of
Stephen's comments. The policy initiatives that we're seeing here
are likely to support more LNG exports and more gas power
generation relative to the status quo.
Ariana Salvatore: So, Devin, one of the
things you mentioned there is regulation, and we think that's
specifically reflected in this theme of unleashing American
energy that Trump likes to talk about. It seems that this would
set the stage for looser regulation and more supportive policy
for oil and gas development.
Do you expect any meaningful changes in near-term investment
levels or production growth across the industry?
Devin McDermott: It's an easy one, Ariana.
No. The reality is the majority of U.S. oil and gas investment
activity occurs on state or privately held lands. It's regulated
at the state level. And the amount of investment that occurs
across presidential election cycles really doesn't change all
that much. And, in fact, some of the highest growth years ever
for the U.S. oil and gas sector occurred under the Obama
administration and also the most recent Biden term where
production of both commodities actually hit all time highs.
So, when your baseline is things really aren't that bad, it's
tough to do much that really accelerates the throttle and causes
companies to add more activity or add more oil or gas drilling
rigs. And the last thing I just say on this point is the sector
is not funding constrained. There's adequate free cash flow;
there's adequate investment capacity. And that also is another
limiting factor on doing anything that positively influences
willingness to spend capital.
In the end, it's really more about price – and where oil prices
specifically goes as it relates to oil and gas investment –
rather than policy.
Stephen Byrd: So, Ariana, let me move from
Devin's thoughts on price back to policy – and if you take a step
back, a key question that we often get asked is: Will the
President's executive orders be fully implemented? What do you
think?
Ariana Salvatore: Well, it's always
necessary to frame these policy proposals in terms of their
feasibility, right? So, we're still parsing through all of the
details of these executive orders. But we already feel higher
conviction in some areas over others, where we think the
president has clear and present authority to make policy changes.
For example, President Trump can pretty easily unilaterally
decide to move away from Biden's clean energy targets, but he's
going to have a much harder time rescinding money that has
already been appropriated, dispersed, or obligated towards these
ends. For example, through the Inflation Reduction Act. We think
that process is going to be much longer and likely result in a
very targeted repeal as opposed to a broad-based claw back of
funds.
Stephen Byrd: Just thinking about
sequencing, can you talk more about, sort of, the potential
specific sequencing of these policies?
Ariana Salvatore: There are a few different
balls in the air right now, so to speak, as we noted in the run
up to the inauguration. We expected President Trump to focus
first on the areas that are more within his unilateral control as
president. So, that really comes down to tariffs and trade policy
more broadly, as well as immigration.
I would also put deregulation in that bucket, but more on a
sector specific basis. So, as we've talked about, we think
there's clear deregulatory tailwinds for the energy sector. It's
also clear in financials. But across the board, these are going
to have more limited success in the energy complex.
But Stephen, back to you, given everything that we've been
talking about, how do you see the future of clean energy,
renewables, EVs – all these elements that make up the Inflation
Reduction Act and the broader energy transition?
Stephen Byrd: Yeah, as I think about the
areas that are most at risk, I think it's very clearly electric
vehicles as well as wind power. Both have been, the subject of
direct criticism and we would expect a high risk of elimination
or reduction of support there. So that will cause some issues. I
would say especially offshore wind faces multiple issues and we
think the growth outlook is now very challenged.
Now that said, onshore wind is often, for example, done on
private land rather than public land, and the economics in many
locations for both wind and solar remain quite favorable. And I
think a big area of underappreciated upside would be AI itself –
in the sense that the hyperscalers have very significant zero
carbon emissions goals. So, what we see happening is we think
these hyperscalers over time as they build out more and more data
centers, which do have very high carbon footprints, we do think
these hyperscalers are going to engage in power contracts with
new renewable projects. So that is a boost to demand that I think
the market is really not well appreciating.
Ariana Salvatore: And finally, let's
consider the issue of powering data centers. Devin, you've spoken
about your positive outlook for natural gas. Do you think natural
gas is going to play a bigger role in powering large U.S. data
centers?
Devin McDermott: Yeah, we do, and there's
been an uptick in natural gas related announcements as it relates
to data center growth in the U.S. over the last few months. And
more recently, we've actually seen some very large deals; plus
carbon capture which addresses some of the emissions concerns
that Stephen was mentioning before – that the hyperscalers have
longer term.
It's important to contextualize this, though, with the broader
growth backdrop for natural gas. The market here domestically is
on the cusp of what we see as a structural growth cycle driven
really by two key pillars. The first of which is that rise in LNG
exports that I was alluding to before, where we're on track to
roughly double U.S. export capacity over the next five years. And
the second pillar is power. And power has a lot of different
subsets to it. It's onshore manufacturing, it's this broader
trend of electrification, like more electric appliances, a little
bit from EVs. Some underlying industrial activity growth and then
data centers in AI.
So that is meaningful. That's a lot of gas, but there's also a
lot more in all the other buckets I talked about.
Ariana Salvatore: Stephen, pivoting back to
you, beyond natural gas, how do you see this theme of powering AI
developing more broadly under the new Trump energy policies?
Stephen Byrd: Yeah, you know, I think
broadly what we see is that a number of debottlenecking
technologies are going to become very important. We cannot get
enough power for data centers that we need really over the next
several years. So, we're going to need to be very creative.
One option will be to build data centers at large nuclear power
plants. I think we'll definitely see that. We will also, I think,
see converting bitcoin sites into data centers. That's going to
be quite popular. And then lastly, I do think electric
transmission will see excellent growth. That is certainly one way
to try to debottleneck the grid – is to increase the grid itself.
That takes many years, but I do think there will be more and more
willpower. Both at the federal and state level to provide
incentives for electric transmission. So that's an asset class
that's definitely a winner.
Ariana Salvatore: Last question for both of
you, Stephen. I know we're going to hear from you in an upcoming
episode about the implications of DeepSeek, but just to get a
little bit of a sneak peek here. I'd love a quick take on how
you're thinking about DeepSeek.
Stephen Byrd: It's really quite jarring in
a week to go from a $500 billion U.S. AI plan to a LLM with a
reported price tag of just $6 million. I come away bullish on
power demand, and let me walk through why that is. You know, I
think that as the cost of inference drops, and we're seeing many
signs of that – not just DeepSeek, but many other developments.
As that happens, the absolute demand for inference compute goes
up, and that compute requires a lot of electricity, so I'm quite
bullish there.
Also on AI training, I think the market has gotten too negative.
I think that what we'll see is continued LLM R&D to go to the
next level of capability. And there are at least five U.S.
companies who are going to spend in the tens of billions,
possibly into the hundreds of billions of dollars each on
training the next generation of Large Language Models, which
could be much, much more capable than the current generation. So,
I'm actually quite bullish on the outlook for power demand from
AI.
Ariana Salvatore: Devin?
Devin McDermott: The news drove a big
dislocation across the gas value chain and pullback in many
exposed stocks. And we think those types of dips are a buying
opportunity because the gas setup is constructive or compelling
for many reasons. Power is one of them, but you're not paying for
power in the stock prices today.
Ariana Salvatore: Stephen, Devin, thanks
for taking the time to talk. And to our listeners, thanks for
tuning in. If you enjoy Thoughts on the Market, please leave us a
review wherever you listen and share the podcast with a friend or
colleague today.
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