[Salon] Oil and Trump 2.0 - ArabDigest.org guest powt

Oil and Trump 2.0 Summary: Donald Trump will do whatever he can to deliver on his promise to cut energy prices in half within 12 months. But factors outside of his control will prevent him from achieving anything more than a modest ‘win’, if that. We thank our regular contributor Alastair Newton for today’s newsletter. Alastair worked as a professional political analyst in the City of London from 2005 to 2015. Before that he spent 20 years as a career diplomat with the British Diplomatic Service. In 2015 he co-founded and is a director of Alavan Business Advisory Ltd. You can find Alastair’s latest AD podcast Of peak oil, grey rhinos and $70 a barrel here. “I will govern by a simple motto: promises made, promises kept. We're going to keep our promises. Nothing will stop me from keeping my word to you, the people.” Donald Trump, 6 November 2024 In the 7 November podcast, the Cato Institute’s Jon Hoffman reflected on the unpredictability of Donald Trump who is nothing if not mercurial. Indeed, the president-elect takes great pride in being unpredictable; and even and perhaps especially his most ardent supporters do not take his word literally. Nevertheless — and consistent with Mr Trump’s victory address from which the above quote is taken — I stand by the case I laid out in the 20 May Newsletter that one’s starting point in trying to anticipate what he will do once he is back in the Oval Office should be what he has said on the campaign trail. Mr Trump’s commitment to halve energy costs within 12 months is a good example of a pre-election promise to be taken seriously but not literally. Its cornerstone is boosting domestic oil and gas output which he will be able to encourage by as the US bank Citi reflected in a 7 November note: Reversing “the Biden era's increases in royalties, costs for minimum bids, and lease rates on Federal lands”; Opening up more federal land to exploitation; and, Rolling back regulatory hurdles and renewables subsidies. However: As Mr Biden discovered when he urged US producers to boost supply in 2022, ramping up output takes time; US oil production is already at record levels, i.e. averaging 12.9 million barrels per day (mbpd) in 2023 and projected by the Energy Information Administration to hit 13.2 mbpd this year; and In the absence of a state-owned oil company, decisions over whether to ramp up output ultimately rest in the hands of a private sector, which is more interested in paying dividends than in pumping greater volumes at lower prices. Even more significantly oil and gas are, of course, global commodities and prices are set globally based not only on supply but also demand. Note how even OPEC+, which still has around a 50 percent share of the global market, has been unable to sustain the price of Brent crude above US$75 per barrel (pb) this year despite its voluntary cuts in output, the ratcheting back of which has (again) been postponed. With all due respect to Citi’s analysts, their hope that Mr Trump could persuade the cartel to taper its production cuts more quickly is surely no more than wishful thinking. Nevertheless the Trump Administration has at least four other options which could, by design or inadvertently, encourage a slide in the oil price globally. Consider: Easing US sanctions on Russian energy exports, for which Vladimir Putin is angling, would boost supply in theory at least despite the efforts of the ‘dark fleet’. Mr Trump’s love of a deal could encourage him down this track as part of a package to end the Russia/Ukraine conflict (even though I doubt he could secure anything more than a ‘time out’). We can reasonably assume that some EU members, notably Germany, would be anxious to jump on this particular bandwagon. Mr Trump could renege on his promise of “maximum pressure” on Iran through ramped up sanctions. However, I very much doubt that he would do so. Rather, he could decide/be persuaded that the best way to end the current conflict would be to join Israel in bombing Iran’s nuclear facilities. As Bill Law and Jon Hoffman discussed in last week’s podcast, this would also go down well with the president-elect’s white evangelical base. Furthermore, if the US did not come to Israel’s aid, Benjamin Netanyahu, who recently described preventing Iran from acquiring nuclear weapons as his “supreme objective” and whom some believe to be determined on regime change in Tehran, might go ahead anyway, meaning a more protracted conflict than would otherwise be the case and a lower probability of success. Although investors have been remarkably relaxed about supply side risk throughout the conflict, this scenario could see Brent heading towards, or even through, US$100pb as I argued in the 28 October Newsletter. However, any spike would likely be short-lived if the US were directly engaged; and a successful campaign could be worth US$3-5pb off the current price of Brent (i.e. US$74pb) as perceived political risk across the region eased. All this being said, the biggest relevant ‘known unknown’ is how far Mr Trump will proceed on tariffs. A 60 percent tariff on imports from China and 10-20 percent on the EU (and others) would constitute a major ‘hit’ to the global economy and, therefore, demand for oil. There will undoubtedly be a debate within the Administration over how best to use tariffs. However, using tariffs to address the US trade deficit is one issue on which Mr Trump has been consistent since the 1980s. Furthermore, that Mr Trump has asked his former US Trade Representative Robert Lighthizer, a true believer, to take up this portfolio again suggests that he wants to see a maximalist approach from day one. As The Economist pointed out on 7 November, markets are already nervous that the “promised trade war with China will be a drag on oil prices (Brent crude briefly fell by more than 2% the day after Mr Trump‘s election)”. Pulling all this together, I think the Peterson Institute’s Cullen Hendrix is correct to argue that trying to push energy prices down through increased US production “might work over the short-term (and that’s still doubtful), but over the medium and longer terms markets would adjust accordingly.” This being said, a combination of OPEC+ ratcheting back on its cuts in 2025Q1, China’s continuing failure to come up with a convincing (demand side) economic stimulus, easing perceived political risk and trade wars could see Mr Trump able to declare a modest victory of sorts by around this time next year…ceteris paribus! Members can leave comments about this newsletter on the Arab Digest website