Why Oil and Energy Stocks Confounded Political Expectations Under Both Biden and Trump

The Wrong Winner

Texans prefer Donald Trump to Joe Biden, or, for that matter, any other Democrat. Among their reasons is the ex-president’s stance on energy exploration. “Drill, baby, drill” plays well in a region where half a million people are directly employed in the oil & gas industry and allegedly (such statistics are suspect) another 2.4 million workers are indirectly employed. So, too, does the prospect of cheaper gasoline, in a state that logs above-average driving miles.

Energy-company chiefs agree with the people. In fundraisers in Houston and Dallas this past May, the former president raised $41 million in campaign donations from oil-company executives. Said one CEO, “Trump’s energy policies—less regulation and favoring fossil fuels—are better for business and better for the economy.”

Given that backdrop, one would expect that energy stocks fared better under Donald Trump’s administration than they have under Joe Biden’s. Not so. After sinking through Trump’s presidency, oil & gas stocks have rallied powerfully under his successor.

The chart below supplies the evidence. It shows the cumulative performance of the Morningstar US Energy Index during 1) Trump’s presidency, from February 2017 through January 2020, and 2) Biden’s administration, from February 2021 through August 2024. The numbers are presented in two ways. The orange bars depict absolute total returns, while the purple bars give the relative performance for each series, when compared with the overall US stock market.

(Note: Starting the measurement period on the election dates rather than when the presidents were inaugurated doesn’t change the outcome.)

Yikes! What happened?

Oil Stocks: A Flawed Premise

To start, the parts of the argument do not sum. States Morningstar Senior US Economist Preston Caldwell, “People simply assume [ex-President] Trump can be good for energy stocks while reducing oil prices. But if oil prices fall, then the net effect on earnings of US energy stocks is likely to be negative.”

To be sure, it’s possible that lower pump prices could coincide with an energy-stock rally. But that is not the way to bet. Oil prices plummeted in 2001; so did energy stocks. Oil spiked from 2005 through 2007; so did energy stocks. Oil sunk during 2014 and 2015; so did energy stocks. Oil fell once again in spring 2020; so did energy stocks. To cite Captain America, I can do this all day.

Which leads one to ask, if increased production will likely lead to cheaper oil prices, and cheaper oil prices are demonstrably bad for the shares of energy companies, why do its executives support the ex-president?

To answer my rhetorical question, self-preservation. Opening the regulatory gates might harm the earnings of energy companies in the short term. However, with Biden aiming to have 50% of all new US vehicle sales be electric by 2030, and Kamala Harris pledging four years ago to require automakers to build only electric or hydrogen vehicles by 2035, the alternative is clearly worse. Better pain today than the threat of extinction tomorrow.

Energy executives are not illogical. But buying the stocks of their companies because deregulation is coming would seem to fit that description.

The Global Energy Marketplace

Presidential candidates rarely discuss the global economy. Voters don’t wish to hear about how US fortunes depend in large part on the actions of other nations. Strong presidents determine their country’s fate.

Brave talk. However, the energy markets operate differently. The United States has a large energy footstep, accounting for above 20% of global production and consumption. But larger yet are the actions of other countries. Even if presidents directly controlled every aspect of US oil, which of course they do not, the remaining 80% of the marketplace would be out of their hands.

Which, for the most part, limits the effect that presidents can have. As the next exhibit demonstrates, the global demand for oil faded during Trump’s administration. Its growth rate dwindled during each of the first three years of his term, before outright shrinking in 2020. In contrast, consumption has been robust during Biden’s administration.

Biden supporters will maintain that the chart vindicates their candidate’s pro-growth policies, while Trump voters will point to the concurrent rise in oil prices as signaling the current president’s failure. A less-partisan reading of the data is that, to neither his credit nor blame, Trump served as president when global oil demand slumped, culminating with covid-19′s arrival. In contrast, Biden took office as demand revived, also neither to his credit nor blame.

Presidents are big. The world is bigger.

Bait & Switch for Oil

A final consideration is that politicians aren’t always entirely candid. I realize that may come as a shock to some, for which I apologize. But the truth must be spoken. While campaigning, presidential candidates have at times made assurances that have not entirely been met. (For example, Franklin Delano Roosevelt pledged in 1932 to balance the federal budget.)

Such was the case with Biden’s 2020 denunciation of fossil fuels, decried by the conservative Heritage Foundation as “radical” and “reality defying.” As environmentalists later learned, political promises are one thing, but enacting them against the public will is quite another. Once in office, President Biden blinked. During his tenure, the Department of the Interior has approved more new drilling permits than it did under President Trump.

Admittedly, not all of Biden’s energy policies have been loose. His administration has been reluctant to lease new public lands for drilling, for example. That said, during his tenure, monthly US oil production has steadily recovered from its covid depression. Output now at its highest-ever level, slightly above its November 2019 peak.

The Reverse: Clean Energy

This article so far has only covered half the energy-stock story. Just as oil-company shares struggled under their proponent’s presidency, only to soar during their critic’s administration, so as well did the shares of clean energy companies. Except, of course, the roles of hero and villain were reversed. Despite Trump’s ongoing war against wind turbines, as well as his skepticism about electric automobiles, clean energy stocks crushed the stock market averages when he held office. Meanwhile, they have struggled mightily under Biden’s administration.

The only US clean energy stock index that I located that possessed an eight-year track record, Nasdaq US Clean Edge Green Energy Index, shows an especially dramatic difference! Other clean-indexes do not show such terrible recent performance for clean energy equities. That said, there’s no question that clean energy stocks fared much better when Trump was president than after Biden took the reins.

The reasons behind these divergent clean energy performances are less clear—at least to me—than those for oil-company stocks, which is why this column devoted more space to the latter topic. But make no mistake: The Biden presidency was at least as disappointing for clean energy stocks as Trump’s was for companies that extract fossil fuels.

If this article’s evidence doesn’t convince you of the difficulty of using political results to select investment themes, I am not sure what will. It certainly has convinced me.