The Democrats' Energy Game Plan

How will Congress approach energy policy now that the Dems are in control? Look for many things to shift—and watch the weather

by Tina Vital From Standard & Poor's Equity Research

The 2006 midterm elections saw the Democrats win control of Congress for the first time since 1994, which may allow them to pursue legislation to induce the U.S. to cut oil use and control greenhouse gases. It remains a question whether these intentions can be realized, particularly in the near term.

Nevertheless, we are likely to see shifts in energy policy, as key players lost reelection bids and others will give up committee chairs to more environmentally oriented Democrats. Specifically, Richard Pombo, chairman of the House Resources Committee and one of the most aggressive proponents of expanded drilling access to offshore development, lost his seat and will likely be replaced by Jerry McNerney, a Democrat and purported expert on wind energy.

Control of the House Energy & Commerce Committee will shift from Republican Joe Barton of Texas to Democrat John Dingell of Michigan. Dingell has not expressed support for carbon dioxide limits but favors nuclear waste legislation that could help the atomic energy industry build the first new reactors in decades.

Musical Chairs

Democrats are also likely to continue a Republican investigation into whether the Minerals Management Service (MMS) is collecting oil and gas royalties owed the government for drilling on federal lands. According to news reports by energy information service Platts (like S&P and BusinessWeek.com, Platts is a unit of McGraw-Hill—MHP), Dingell said that he would like to look into 1998 and 1999 leases issued by the MMS that did not include price thresholds that would have allowed the federal government to collect royalties.

Shuffling of leadership chairs in the House and Senate could also open opportunities on climate change. Republican Senator James Inhofe will be replaced by Democrat Barbara Boxer on the Environment & Public Works Committee.

And according to Platts, Nancy Pelosi of California, the Democrat who is expected to lead the House when the next Congress convenes in January, has said Democrats will, within hours of taking control, move to repeal billions of dollars in oil tax credits that can be used to develop gasoline alternatives such as ethanol, renewable energy, and advanced vehicles.

Still Need a Supply

While some energy subindustries, such as "homegrown" alternative energy, may be given more support by the Democrats than the Republicans, S&P believes the Democrats will be less friendly towards certain key industries that they perceive to have been unduly favored by the Republicans. For example, energy companies are likely to be in for a rougher ride, and may face hearings to investigate price levels.

While both parties complain about high energy prices, there may be little that can be done about them in the near term. If there is a cold winter, natural gas prices are likely to soar. That has hit manufacturers particularly hard—and should renew interest in increasing supplies to lower the price of natural gas. As a result, we expect renewed interest in opening certain restricted U.S. regions (such as the Gulf of Mexico) to oil and gas drilling.

Analyst Vital follows shares of integrated oil and gas companies for Standard & Poor's Equity Research Services.