Will Trump Overthrow Oil Prices Plunge On Demand Destruction, Will Trump Intervene? There is a new name being bandied about as an answer to the great unknown that is the oil and gas market.
The discovery of massive shale oil reserves in the United States has prompted huge amounts of speculation that the United States will soon become the largest oil producer in the world. Since so much of the world’s oil is used for transportation, and since so many of us depend on it for our daily living, there is concern that prices may rise at some point soon.
While the impact on oil demand destruction from increased supplies in the U.S. will be minimal, some in the oil industry are afraid that OPEC countries like Saudi Arabia and Venezuela will be tempted to increase production to protect their market share. If they do this, the supply-side effects can be devastating. Short-term supply shortages can disrupt supply and transportation costs; long-term supply issues can disrupt demand for goods and services.
The likely impact on crude oil prices if OPEC increases production is uncertain. It’s worth noting, however, that Trump seems quite open to the idea of a big energy president if it means keeping U.S. jobs.
In recent weeks, Trump has indicated he will cut taxes, perhaps as high as 15%. He also wants to renegotiate the North American Free Trade Agreement (NAFTA) with Mexico and Canada, to increase U.S. exports and to eliminate burdensome regulations that he sees as holding back U.S. companies. This combination could make it easier for U.S. producers to compete against the cheaper Mexican and Canadian oil.
But if OPEC starts producing more than it can sell or tries to force U.S. producers to agree by drastically raising production, then U.S. producers would be unlikely to have the cash to meet demand, even with higher taxes. What happens if oil prices go even lower? That’s where Trump comes in.
Trump has been all over the map when it comes to the economics of shale oil. He’s talked about how the cost of extraction is far too high, how technology is restricting drilling, and how the technology needed to make it happen isn’t available yet.
But he’s been rather inconsistent in his views on whether drilling for shale oil should be done at all. He said he opposes it a few years ago, but at one time it looked like he was already on board. In recent weeks, though, he’s called for fewer government regulations.
With that said, however, the president is well aware that he needs OPEC, in particular Saudi Arabia, to lower production in order to offset a decline in U.S. oil production. It’s possible that Trump doesn’t fully understand the economics of oil and gas production, and what the implications would be if it turned out OPEC needed help to keep oil prices down.
Trump is no economist, so I am not sure what his instincts on the matter are, but he’d better get the economics right if he wants to push through something he knows nothing about. For starters, the shale oil reserves that he wants to exploit are unlikely to be economically viable until 2030 or later.
While it would be nice to think that prices will fall further before shale oil becomes a factor, that is not likely to happen. And with little information about the economics of oil and gas exploration, it’s hard to tell what the best strategy is for the president to take if shale oil is to be a contributing factor to supply and demand imbalances.
Still, don’t expect Trump to act boldly. More likely, he’ll act on instinct, and that will mean an informed decision from the Oval Office.