October 11, 2012

Obama vs. Romney: Energy Policy + Tax Policy = Major Differences for Investors

From regulation to dividend taxation, Obama and Romney have very constrasting policies affecting the energy sector

Workers on an oil drilling platform. (Photo: AP) Workers on an oil drilling platform. (Photo: AP)

The results of the upcoming presidential election will, naturally, impact American investors and their clients in many ways. But, experts point out, energy investing and dividend taxation are two important and related areas in which the candidates’ differences are fairly clear and their policy implications’ pretty straightforward.

“Governor Romney had five points on energy policy that he highlighted in the first debate, and one was energy independence, which is a key area of difference from where President Obama stands on energy policy,” said John Derrick, CFA, a portfolio manager with U.S. Global Investors, in an interview with AdvisorOne.

“The Obama Administration favors alternatives energy sources to a large extent and has blocked drilling and the Keystone Pipeline, for instance,” explained Derrick.

“And the feeling in the investment community is that this administration is not that friendly to the [traditional] energy business,” he noted. “That would shift with Romney, who favors less regulation, less government involvement and more opening up of federal lands to drilling. Also, offshore areas that are now restricted could be opened.”

Other experts agree. “An Obama election is better for alternatives, like wind and solar, which are heavily dependent on government [and other] subsides to be viable, and judging from the pre-election rhetoric, Romney is not in favor of this strategy,” said Geoff Jay, head of energy-sector research and analysis with Janus Funds, in an interview.

When it comes to oil and gas investing, “Obama says he favors growing more energy at home,” added Jay. “But the hurdles would be lower under a Romney presidency, … and the climate for traditional oil and gas companies [to invest and expand operations] would be easier under a Romney presidency.”

Another factor to consider, says Geoffrey Styles, head of  the consultancy group GSW Strategy Group, is that much of the increase in U.S. energy production has come from natural gas and shale development. In contrast, production from renewable sources is taking a long time to come on stream.

“If Romney is elected, there could be a feeling of relief for the energy industry that it can move forward with some [projects] that are not possible in the current environment,” Styles said in an interview.

This shift could lead to greater U.S. production and perhaps jobs in the energy sector, Styles says.

Dividend Policy

Many energy companies are known for their high dividend payouts, such as electric-utility firms. This situation has many energy-industry players concerned with where the two candidates stand on dividend taxation.

Obama has said that he would like to keep in place the lower tax rates of 5%-15% for dividends from the 2001 and 2003 tax cuts for families earning less than $250,000. The so-called Bush tax cuts would expire for the top 2% of taxpayers, who would see their dividend tax rates revert to levels from the ‘90s.

For his part, Romney pledged to maintain the current 15% capital gains and dividends tax rates for higher-income Americans, while eliminating these taxes on those earning less than $200,000 per year.

Although maintaining the current dividend tax level is not a given with Romney in office, due to fiscal pressures and other political factors influencing Congress, “The situation would be more favorable for investors in general with him,” Derrick said.

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