Oil & Gas

Trumping Up Oil Prices?

Photo: @RealDonaldTrump on Twitter

With the rapidly incoming inauguration of President-elect Donald Trump, policy experts in every field are grasping for clues as to how he would govern, how his policies will affect their specific areas of expertise.

It is tempting to revert to form during prior presidential transition periods and analyze statements from the campaign for clues as to policy positions in order to speculate as to how the new president will affect oil prices.

But, one thing is certain:

This incoming president has a history of surprises and unpredictability.  His statements from the campaign are best viewed as indicators of the general direction he will take as president.

It is better to view Mr. Trump holistically, rather than to drill down into his specific policies.

When it comes to Houston, Texas, the most important issue for the local economy is the oil price.

When the oil price is up, the steak houses start requiring reservations and constructions cranes loom large over the city.

Everyone wants to know how a Trump presidency will affect the oil price.

What we know is fairly basic.  Trump has stated he wants American energy independent and to reduce regulations on the oil and gas industry that make it harder to drill.

Energy dominance is considered by Mr. Trump to be a key part of our domestic economy and, a foreign policy goal.

According to his America First plan, Mr. Trump wants America to no longer be reliant in on foreign cartels that supply oil.  Federal lands – including offshore oil fields – would be opened if Trump is able to execute his stated energy plan.

The president-elect views energy as something that should be cheap for consumers.  It is already labor intensive, creating a win/win environment for consumers and oil field workers alike if prices go up, not to mention the thousands of oil company office workers all across the city of Houston.  If oil prices increase, they will go hand in hand with a rising tide that will benefit the economy as a whole, provided prices do not skyrocket to unreasonable rates.  Under Trump, the American consumer won’t have to worry about gasoline prices being burdened with punitive tax rates.

Mr. Trump understands that an energy company worth $100B will provide livelihoods for people far beyond what can be offered by a start-up office in the Bay Area with the same valuation or greater.  That understanding was a driving force of the big picture in his campaign.

On the campaign trail, this viewpoint mostly manifested itself in the rust belt states he needed to flip Republican to win the election.

Coal and steel simply provide more jobs than the Silicon Valley tech companies that supported his opponent overwhelmingly.  However, the same principle applies to the Texas oil and gas industry.

In short, energy provides real jobs for real people, the kind that Mr. Trump must keep in his coalition if he is to win re-election.

But, the problem is over-supply.

Therein lies the catch.

The problem with the domestic oil and gas industry isn’t the inability to access reserves.  Sure, cutting regulations will cut costs.  But, the oil and gas industry has found so much shale that it could drill for a decade without letting up.

What’s stopping them is that prices are too low.  The wild swings of the energy industry are too unpredictable and sending companies into bankruptcy who financed their asset purchases at $100 oil.

We also know that Trump is business friendly.  He listens to high powered energy executives like fellow billionaire Harold Hamm.  The oil patch has been known to produce colorful billionaires with a long history of being slammed and hit hard by foreign cartels controlling the prices and damaging their businesses.

Being guided by energy executives, Trump is certain to pinpoint the problem with oil and gas.  How he acts will be uncertain.

Of course, it was the U.S. shale revolution that flooded the world with cheap oil and drove down the price of oil.  OPEC responded by refusing to turn down the taps.  As a cartel whose sole purpose of existence is to control oil prices to the benefit of its member nations, OPEC went to war with U.S. companies with the explicitly stated purpose of forcing them to draw down production.  This draw-down could only occur by bankrupting enough of the shale drillers to allow asset consolidations into the super-majors who could then control production rates as they had done in past eras prior to the shale revolution.

To be certain, shale output did slow.  But, it didn’t come to a near halt as OPEC has wanted.  Instead, OPEC is now negotiating among its own member nations to cut the flow of oil in an attempt to raise prices.  However, the age old collective action problem of cheating is now an issue.  Even if member nations can agree, there is little to stop nations from cheating and selling oil on the side to meet their national budget demands.

So, what can Trump do?  What can any president do?

His first option is to do nothing.

Let the market decide.

Or, more accurately, let U.S. oil companies continue to compete in a market where cartel behavior drive prices.

The first option of doing nothing is what got us into the current situation.  When U.S. financiers can’t predict future prices due to the unpredictability of cartel decision-making, it undercuts the ability for American oil companies to self-finance through the stock market or private offerings.

Past presidents would simply tell the oil industry to tough it out and remind investors to diversify.

But, that doesn’t exactly come across as putting “America First” or making America “great again.”

And, why should American producers be at the mercy of a cartel?

In a free market, prices would reach stability and fluctuate only due to large factors which could theoretically be anticipated and predicted in the market.

In a world where the market can be flooded at any time with OPEC oil and American companies can be wiped out by the whim of foreign powers, has America been made great again?

What is the “Make America Great Again” approach to the Oil Price dilemma?

It’s actually pretty clear when the analysis is performed.

Trump wants America to be energy independent.  He will likely listen to American oil barons in making his decisions.  The problem for the domestic oil and gas industry is oversupply.

With the Wolfcamp shale in West Texas, America now possesses a single field second only to Saudi Arabia’s most prolific field.  America can be energy independent.

Trump could pursue tariff policies to punish producers who collaborate against the free market to set oil prices, and create instability in domestic energy and financial markets.

He could also designate certain foreign countries as terrorist supporting nations and apply sanctions.  Both tariffs on foreign oil and sanctions alike would require delving deep into the details to avoid as many negative repercussions as possible.  And, these would both be very difficult to enact politically.

However, Trump has campaigned on tearing up foreign treaties that harm the America worker.  Reducing foreign imports would help to insulate American companies from the volatility of cartel-controlled markets.  It would also drive the price of oil extremely low outside of the U.S. and starve the national budgets of countries like Iran and Saudi Arabia which both sponsor terrorism despite Saudi Arabia officially being an ally of the United States.

An aggressive “America First” energy policy would severely weaken adversaries who finance terrorism on the sly.

For a president who wishes to shake up the status quo and have America start winning again, placing restrictions on the import of oil from cartel nations or nations with ties to terrorism could be a way to give a strong jolt to economy – the Houston economy in particular – while also weakening the economies of enemies and frenemies alike.

Of course, we don’t know how Trump will actually govern.  But, there is room for major changes when it comes to energy policy.  The country just hasn’t explored any of those changes to this point.

No one has dared to challenge the Saudi imposed hegemony of the global crude markets.

Do we now have a president who is willing to pursue major changes?

This has a been a Microscope Houston report.

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