If President Donald Trump is not the most significant player in global oil markets today, he's at least its biggest wild card. Tweets savaging OPEC, U.S. sanctions on Iran and Venezuela, and a precarious trade policy that threatens the health of the global economy can push energy markets in very different directions in the near-term.
What’s clear is the president will not sacrifice his foreign policy goals, chiefly the isolation of Iran in hopes of regime change there, for fear of rising oil prices. Instead, he will blast OPEC on Twitter and pressure Saudi Arabia to pump more oil to tamp down prices. As for Trump’s goal of securing “energy dominance” on the back of the remarkable shale boom, well, that appears to be taking a back seat for now. Washington is back to groveling to Riyadh about hiking supplies to keep U.S. gasoline prices in check and the economy steaming forward, with midterm elections looming in November.
But let’s face it, by pulling the United States out of the Iran nuclear deal and reinstating harsh sanctions on OPEC’s number three producer, Trump has shifted the focus of oil markets from the performance of shale to the whims of Saudi oil policy. It’s true that Riyadh’s interests are aligned with Trump’s when it comes to Iran, and the kingdom has already shown its commitment by moving to jack up production toward a record of 11 million barrels a day. Trump has said he received assured from Saudi King Salman that output could max out so that the kingdom is producing nearly its entire capacity of 12.5 million barrels a day, if necessary.
Let’s hope it doesn’t come to this. It’s believed that Saudi Arabia holds 2.5 million barrels a day of the world’s entire spare capacity of 3 million to 3.5 million barrels a day. Every extra barrel it produces -- as well its Gulf OPEC allies Kuwait and the United Arab Emirates – means there is less cushion if further supply disruptions occur. And with oil market hotspots like Iran, Venezuela, Libya and even Canada, you have a recipe for a return to triple-digit oil prices.
With the United States’ bargain with Iran’s arch-enemy Saudi Arabia laid bare, the next OPEC meeting in November should be interesting. Managing internal politics within the cartel has never been easy, but nothing short of economic civil war has been declared, with the United States-Saudi alliance looking to bury the Islamic Republic for good.
Trump was smart not deal a death blow to Venezuela with an embargo on Venezuelan oil earlier this year after the sham election of President Nicolas Maduro. Maduro’s regime is doing just fine running Venezuela’s economy and oil sector into the ground on its own, so the embargo was not necessary. Venezuelan oil output of around 1.4 million barrels a day today could easily drop below 1 million barrels by the end of the year. News that President Trump pressed his aides last August about a possible invasion of the South American oil producer shows that no policy option is ever really off the table with this administration.
At home, Trump’s deregulatory agenda has been a boon to the U.S. oil industry since he took office in January of 2017. But lately, the industry has been befuddled by some of the president’s domestic and foreign policy moves. Trump’s attempt to revive the nuclear and coal industries is a textbook example of playing favorites in markets.
There could be more than just collateral damage here; in fact, the policy could be taken as a war on U.S. natural gas producers, who have earned their substantial market share in U.S. power generation by being the lowest-cost provider. Picking winners in a free market is a no-no for conservatives – mainly because politicians have shown time and again to be horrible at such choices. Many of the largest independent oil producers in the United States are also major producers of gas, and such policies that artificially incentivize nuclear and coal threaten their revenues and potential investments in future oil projects.
The economy has been humming along nicely since Trump took office, but his trade policies are cause for concern. The president last week slapped tariffs on $34 billion worth of Chinese goods, triggering retaliatory tariffs from China. The levies enacted, so far anyway, avoid hitting energy trading directly, but Beijing has threatened a 25% tariff on U.S. crude and oil products if Washington makes good on threats to enact additional tariffs. Unfortunately, it appears things are heading in the tit-for-tat direction.
Trump must reconsider. Exxon Mobil CEO Darren Woods said recently that Trump’s existing tariffs, mainly on steel and aluminum, “run the risk of making projects less competitive." Chevron boss Mike Wirth said the protectionist measures “run the risk of being a drag on growth.” Others have said that big petrochemical projects now being planned – ones that would be fed by booming shale gas and condensate production – are vulnerable under the current tariffs.
The last thing the nascent U.S. energy export business needs is for China, the world’s most coveted oil and gas market, to be closed down by an escalating trade war. And that is precisely what would happen if U.S. crude and oil products cost 25% more than alternative supplies - from say, Iran. This would not only hurt our oil industry – which has maxed out its ability to refine domestic shale oil – but would also undermine Trump’s goal to narrow the trade deficit.
If energy, one of the world’s most valuable and strategically important economic sectors, becomes mired down in a trade war, who knows where the damage will end. The proliferation of an ugly trade war threatens the entire global economy and would put a sizable dent in demand. That’s one way the president could curb oil prices – but sacrificing global economic growth would be the ultimate price to pay.
