November 13, 2024 [Investing Daily]- The energy sector experienced a notable boost following Donald Trump’s reelection, with the Energy Select Sector SPDR Fund (XLE), which tracks energy stocks in the S&P 500, jumping nearly 4% the day after the election. This surge reflects optimism among investors about fossil fuel investments due to Trump’s anticipated policies favoring oil and gas expansion.

However, renewable energy companies experienced declines, with major U.S. solar provider First Solar (NSDQ: FSLR) dropping over 10%, hinting that Trump’s second term may limit support for renewable initiatives. Let’s take a closer look at this dynamic in the energy patch.

Weighing Investment Options: Traditional vs. Renewable Energy

These market reactions hint that Trump’s second term will prioritize traditional energy sectors, potentially limiting support for renewables while advancing oil and gas expansion.

So, should you sell renewable energy companies and load up on fossil fuel companies? Not so fast. Reality sometimes contradicts our expectations.

The oil industry’s relationship with politics has been complex. Historically, the industry leaned conservative, while Democratic politicians often expressed hostility toward it. Thus, it is a good bet that Donald Trump will treat the oil industry favorably. But that doesn’t necessarily translate into higher profitability.

Policy Impacts on Oil Industry Profits

The primary driver of oil company profits is oil prices. Policies that increase prices tend to benefit oil companies. Global demand, geopolitical factors, and OPEC actions also play a major role.

Nevertheless, oil companies have recorded some of their largest profits during Democratic administrations. For example, neither President Obama nor President Biden was cozy with the oil industry, but the industry profited enormously under both presidents.

Consider two different types of policies. One policy encourages producing as much oil as possible. That would tend to increase oil supplies and keep prices in check. The other policy restricts drilling, which ultimately decreases supplies, and drives prices higher. Which policy is more conducive to higher oil industry profits?

In practice, it’s not quite as simple as that. There is also the demand side of the equation, and the oil market is global. So, regardless of what a U.S. president does, it can be offset by the actions of OPEC (for example).

Comparing Recent Presidential Administrations

Examining recent years reveals these dynamics in action. In 2017, Trump’s first year, ExxonMobil earned $19.7 billion, with steady earnings for the next two years until the pandemic led to a significant $22.4 billion loss in 2020. Across Trump’s term, ExxonMobil’s total profit was $32.5 billion.

Under Biden, oil prices surged as post-pandemic demand outpaced supply, further intensified by the Russia-Ukraine conflict and related sanctions. ExxonMobil recorded a record $55.7 billion profit in 2022, and over Biden’s first three years, total profits reached $114.8 billion. Thus, ExxonMobil earned more than three times as much under Biden as it did under Trump.

A Surprising Trend in Profitability

Thus, contrary to what one might think, during recent presidential administrations ExxonMobil’s highest profit has come under a Democrat (Biden), and their biggest loss came under a Republican (Trump). However, in both cases, there were mitigating factors that extended well beyond the policies of the respective presidents.

Nevertheless, ExxonMobil made more money each year under President Biden than it did in any year under President Trump. That is contrary to what most would have predicted.

Energy Industry Expectations Under Trump

The point here is not to suggest that the energy industry won’t do well under Trump. But keep in mind that his stated policies – to bring gasoline prices to low level – are contrary to the industry’s goals to make more money. So, sometimes reality isn’t what you might expect.

The intricate relationship between policy, market forces, and global events suggests that investors should approach the sector with a nuanced understanding of the many variables at play.