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Trump’s Oil Price Dilemma

Trump Victory speech

President-elect Donald Trump has started naming his picks for key administration offices, and it looks like he is beginning to assemble a team to deliver on at least part of his campaign promises of An America First Energy Plan.

Trump’s agenda includes lifting restrictions and opening onshore and offshore leasing on federal lands, eliminating the moratorium on coal leasing, and opening shale energy deposits. The President-elect’s key arguments for these policies are creating high-paying jobs, lessening and even eliminating America’s energy dependence, increasing tax revenues, and adding billions of dollars in economic activity.

Even if Trump were to deliver on all his pledges - as far as federal law and federal regulations are concerned - the U.S. oil production would be driven by the market—the economics of the supply and demand that determine the prices of oil.

At the time of Trump’s inauguration on January 20, OPEC and a dozen non-OPEC nations are set to begin to reduce crude oil supply with the purpose of killing the global glut and lifting oil prices. Ideally, OPEC/NOPEC taking 1.8 million bpd off the market would speed up the drawdown in global stockpiles and prop up prices.

In reality, few expect OPEC to stick to its commitments and cut as much as promised.

Still, oil prices are now north of US$50, and OPEC (even if some members cheat) may be able to talk prices up a month or so more. American production has been suffering the consequences of the two-year oil price rout, but if oil stays over US$50 for longer, it would entice more U.S. producers to return to work. Oil prices at US$60 or more would lead to even more confidence among U.S. producers—producers who are now ‘leaner and meaner’ and carefully choosing how to invest. Related: Goldman Flip Flops Again, Now Sees High OPEC Compliance

Essentially, Trump’s vision that the oil and natural gas industry could lead to the creation of “another 400,000 new jobs per year” depends on a resurgence in U.S. production, based on higher oil prices. And oil and gas companies in a recovering market may really need to add more jobs after having cut thousands of jobs over the past two years.

In the short term, it will be oil prices that would swing American production, not Trump’s pledge to lift restrictions on federal land. According to the Bureau of Land Management (BLM), the average approval timeframe for an application for permit to drill (APD) between 2005 and 2015 was somewhere around 200 days. The average number of days in which operators resolve any deficiencies has been higher than the number of days the BLM needs to process and complete an APD in every year since 2005 except in 2006 and 2008.

Trump’s promised rise of oil and gas production over the years could have several consequences: kill the oil price increase due to more supply available, lessen America’s dependence on foreign oil (especially OPEC oil as pledged by the President-elect), and increase U.S. exports of LNG and oil. Related: U.S. Solar Boom Continues: 1MW Installed Every 32 Minutes

Increased U.S. production would be good for the oil and gas industry, and would create jobs not only in the sector but also in other industries and in all economic activity in areas close to energy producing sites.

Following the nomination of former Texas Governor Rick Perry as Secretary of Energy, American Petroleum Institute (API) president and CEO Jack Gerard “called on the nominee to make LNG exports a top priority at the Department of Energy,” the API said in a statement on Wednesday.

As for exports, Trump’s Administration may need to strike a delicate balance between increasing LNG exports and keeping enough cheap gas at home to avert price shocks for consumers.

What’s certain is that the oil and gas industry would curry more favor with the new Administration as opposed to the existing one, but any U.S. shale rebound is largely dependent on how oil prices fare, and how companies respond to those price increases.

By Tsvetana Paraskova for Oilprice.com

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  • Spec9 on December 19 2016 said:
    Anyone that thinks that Trump advisors Scott Pruitt, Rick Perry, Rex Tillerson, and Vladimir Putin are going to advise Trump to institute policies that lower the price of oil and thus cause economic ruin to their respective oil dependent homes of Oklahoma, Texas, Exxon, and Russia is just really naive.

    Remember, we got the highest oil prices ever under the rule of a dual oil-man presidential administration of Bush/Cheney.

    Trumpkins got conned.
  • Mulp on December 20 2016 said:
    The only time oil production has increased for a sustained period is when Obama made offshore leases unavailable so big oil was unable to create FUD over small drillers on private land.

    Trump could least a 100,000 tracts offshore which would go only to global oil producers and not a single US driller and US oil production would fall like it did from 1985 to 2009. Not even oil prices tripling and lots of offshore leasing by bush-Cheney did anything to stop the decline from 2001 to 2009.

    Trump could impose a $50 a barrel tariff on imported oil and by the time he leaves office, US production would increase by another 5 million barrels a day on top of the 5 million barrel increase Obama's foriegn and energy policies created. But Trump can't match Obama's 100% increase, just 50% is the best he can do.
  • rjsigmund on December 20 2016 said:
    400,000 new jobs a year is just non-sense....even at the peak two years ago, total employment in the oil and gas industry barely topped 200,000:

    https://data.bls.gov/timeseries/CES1021100001?amp%25253bdata_tool=XGtable&output_view=data&include_graphs=true

    oil & gas may produce a lot of wealth, but it will never produce a lot of jobs
  • steveP on December 20 2016 said:
    Trump has no dilemma: higher prices good for big oil jobs, russia, US rig count.
  • Dieter Heymann on December 20 2016 said:
    There will be another glut since it is as certain as sunrise and sunset that overproduction will happen again. The domestic producers will then lose an oil-war with OPEC. The joker in the deck? Iran.
  • Peter John on December 20 2016 said:
    A Presidential term is 4 yrs and whatever Trump does can be undone. Don't expect the oil exploration firms to sink billions into something that the next President can stop.
  • Danny Staggers on December 21 2016 said:
    Break even on shale is 29 dollars a barrel. That's where the price of oil should be in this country. Drill, drill, drill!

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