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How the Election Could Impact Energy

If a new Congress imposed stricter regulation, disincentive -- and energy prices -- could rise.

Trick or treat?

Those words will be uttered millions of times in the next several hours, but the question has a deeper meaning to energy investors as we approach the Nov. 7 general election.

Quite simply, the election's outcome could set the tone for energy investing for the next two years. However, the impact may be different than most expect.

Democratic Tricks

The generally accepted belief is that a Democrat victory -- the ability of the "blue states" to take control of Congress -- would be bearish for energy investors. Indeed, especially during the current administration, the GOP has been branded the party of Big Oil, while the Democrats have been labeled the party of energy consumers.

Rhetoric of recent years certainly plays that out. From former California Gov. Gray Davis' attacks on "evil energy suppliers" to outcries from Nancy Pelosi and John Kerry over big oil profits at

Exxon Mobil

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,

Chevron

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and others, the Democrats might appear to be out to get energy companies.

Energy companies would undoubtedly be large rhetorical targets for a Democrat-controlled Congress. Take, for example, Henry Waxman, the congressman from California who would likely become the chairman of the powerful House Government Reform Committee. His review of everything, including Big Oil and market-friendly actions from the Federal Energy Regulatory Commission, will likely intensify the scrutiny on many energy companies. The focus on profits and actions of energy companies would also intensify. As such, investors may well be trepid about wading deeper into energy investments.

A Democrat-controlled Congress will probably be more active in pursuing legislation to redistribute profits (read: tax) from energy companies, saying it's to fund alternative-energy research and development. While the goal is noble, the process is likely to be counterproductive.

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Oil and gas companies should be aggressively looking for alternative sources of energy, both to lessen our dependence on foreign sources and to improve the quality of the environment. But more government regulation and taxation will do little to encourage them to do so. Instead, government action will simply raise the cost of existing energy as companies adjust prices to mitigate the impact of additional taxes.

Treats, Sort of...

While this scenario may seem filled with tricks for energy investors, the overall energy landscape under a blue-state Congress might actually be bullish.

First, Democrats would probably not focus on what would

really

help drive energy prices lower: easier access to new exploration and development opportunities in the U.S. If there is a power shift in Washington, legislation that would further liberalize drilling opportunities likely wouldn't see the light of day.

Second, don't expect additional incentives for drilling in higher-risk, high-potential regions. For example, royalty relief in the Gulf of Mexico isn't something a Democrat-controlled Congress will consider, regardless of oil prices. Yet, incentives to drill high-risk wells, which may solve natural gas-supply challenges, are needed to get many exploration companies to accelerate activity in those plays.

Finally, Democrats might be more willing to impose technical and environmental regulations that would serve as disincentives for new investment. As a result, energy companies will lose confidence in the operating climate and, as a result, could consider a slowdown in activity.

None of those policies may sound terribly beneficial for energy companies, but all would be bullish for energy prices. In fact, if demand continued to grow while government regulations further challenged supply, prices eventually could move well above levels seen in recent months.

All of that assumes that a Democrat-controlled Congress can successfully advance its agenda beyond Congress. That is unlikely, considering that the White House's current occupant is an oil man. Therefore, progressive energy policy will likely experience gridlock.

That may turn out to be the best of both worlds for energy investors.

At time of publication, Edmonds was long Exxon Mobil, although holdings can change at any time.

Christopher S. Edmonds is partner and managing director of research at Pritchard Capital Partners, a New Orleans energy investment firm. He is based in Atlanta. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While Edmonds cannot provide investment advice or recommendations, he appreciates your feedback;

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