On August 8, 2016, America’s Republican presidential candidate Donald Trump gave what was billed as a major economic policy speech in Detroit. In it, he laid out his plans for jump-starting the U.S. economy, spurring job growth, and distributing economic benefits to working-class Americans. The speech highlighted an isolationist plan for the nation’s energy industry alongside many other proposed tax cuts and deregulation, revisiting the vision of “An America First Energy Plan” Trump first coined in North Dakota in May.
The Trump campaign’s energy plan blatantly defies established market principles, but it also challenges years of multilateral efforts in combating global warming and global trends toward clean energy and diversified energy structures. Instead, the plan would promote a deliberate overreliance on coal and petroleum.
In essence, Trump’s energy scheme is characterized by three prongs—market-led extractivism, job-promising nationalist sentiment, and selective economic autarky. The first tenet reflects the candidate’s alignment with conservative Republican norms backed by powerful oil interests. It includes calls for reviving the Keystone XL pipeline, lifting coal industry restrictions, augmenting shale resources, and scrapping regulations on the oil and gas industry. In this energy plan, Trump promises to explore America’s untapped oil and gas reserves (worth $50 trillion, by his own estimation) as well as coal reserves three times richer than Russia’s.
The second element feeds into the Trump campaign’s political promises, combining the idea of an energy renaissance with job security and blue-collar wage increases. The last tenet, which stands in stark contrast to his own party’s traditional defense of free trade, nonetheless plays into the profound fear and resentment of many voters left behind in a globalized world. Stoking that antagonism, Trump loudly proclaims that American energy independence and terminating trade agreements with “hostile” oil-producing countries would resolve the pressures they face.
Those promises, while appealing to Rust Belt voters, could not be more wrong.
A fossil fuel-focused extractivist energy regime, like the one Trump is proposing, runs counter to the prevailing market dynamics now respected by major oil producers, especially those striving to diversify shrinking revenue streams away from petroleum rents. Global crude oil prices have fallen from about $115 per barrel in June 2014 to under $35 by the end of February 2016.
Responding to the volatility of the global oil market, many oil-producing countries have started to explore alternative energy sources, a process that began even before the recent price downturn. Since the inauguration of the Camisea project in 2005, for example, Peru has become a major natural gas exporter in South America. Although still a fossil fuel, natural gas is considered to be cleaner than other fuels; it only produces about half the amount of carbon dioxide emitted by coal. Critically, the Peruvian government is committed to balancing its energy production matrix equally among petroleum, renewables, and natural gas. Related: Expert Commentary: Is Crude Set To Drop?
Brazil, Latin America’s largest oil producer, has also sought to diversify its energy profile by adding ethanol to its mass fuel production over the past four decades. Today, the country is the worlds’ second largest ethanol producer and consumer, having created the world’s first sustainable biofuel economy. Nearly half of the country’s energy comes from renewable sources (mainly sugarcane ethanol) and the entire sugarcane agro-industrial system generates gross revenues totaling more than US $86 billion annually (accounting for approximately 4% of the Brazilian economy). The market competitiveness of ethanol fuel has been conscientiously enhanced through the use of new agricultural technologies, complemented by government subsidies. In February 2015, several Brazilian states increased the state tax for gasoline goods and services while reducing taxes for ethanol. Meanwhile, the Brazilian government authorized an increase in the ethanol blend in gasoline from 25 to 27 percent.
Non-discriminatory energy policies and blanket deregulation, as the Trump plan proposes, would leave still-emerging renewables unable to compete with traditional fuels on cost. By subsidizing renewable energies, governments can help the renewable sector take off and ultimately outcompete fossil fuels on the market.
Perhaps the most striking case for diversification comes from the world’s largest oil exporter in both quantity and monetary value: Saudi Arabia. Realizing that declining oil revenues cannot sustain their generous social safety net, the Saudi leadership plans to reduce the country’s oil addiction by privatizing the national oil company, Saudi Aramco, relaxing restrictions on FDI and deepening trade relations with longtime partners, including the United States and the United Kingdom. Looking beyond the international consulting and retail brands with locations in cities like Riyadh (Saks Fifth Avenue and Harvey Nichols, for example), Saudi officials are now aggressively courting outside capital in industries like petrochemicals and infrastructure. Responding to low oil prices and massive domestic consumption, the Saudi government also pledges to production of 9,500 megawatts of renewable energy to diversify its energy market. Related: The Best Way To Unlock Canada’s Crude Exports
That other prominent energy producers are using government levies to incentivize emerging clean energy industries only demonstrates how common sense is lacking from the Trump campaign’s energy plans. This idiosyncrasy is reflected by the candidate’s choice of economic advisors, a team made up of billionaires and investors whose energy considerations revolve around short-term profitability calculations instead of sustainable yardsticks. Trump’s all male, 13-member economic advisory team consists of mostly business moguls in real estate and financial sectors. Among them is Mr. Harold Hamm, an Oklahoma oil magnate and energy advisor to 2012 Republican presidential candidate Mitt Romney, whose energy plan proposed expanding energy production, streamlining regulatory processes, accelerating the Keystone pipeline, and prioritizing conventional energy sources (oil and coal) over renewables based on economic competitiveness.
Tellingly, Trump’s plan to reinvigorate both the natural gas industry and coal production at the same time is self-defeating. Given the abundance of price-sensitive alternatives on the energy market, promoting one outdated source (like coal) would inevitability crowd out other sources (like natural gas), creating unhealthy competition, over-supply and negative externalities that cannot be corrected for by the market. In addition, U.S. government support for cheap shale gas in the national fuel mix is a primary culprit behind the shuttering of American coal plants in the first place. That rapid shift toward natural gas, aside from pushing the coal industry into decline, is helping the U.S. meet emission targets and reduce pollution. A possible comparison can be found in Chile, where the overproduction of solar energy is hurting power companies amidst global price downturns, a problem compounded by limited local transmission infrastructure.
Aside from the environmental costs supported by an overwhelming science literature on global warming, a pro-hydrocarbons energy regime will have devastating consequences for the country’s economic health and social capital. The underlying line question is simple: who will benefit from Trump’s hydro-carbon heavy energy plan? Certainly not his working class supporters. Hydrocarbons are capital-intensive, with only limited job opportunities and little spillover effect. To add icing to the cake, Trump’s ideology of closing down economic borders would further hurt the average citizen. An autarkic economy with unrealistic promises of energy self-sufficiency cannot sustain itself; instead, it would fail to deliver enough sustainable jobs as extractive developments crowd out other economic activities and inflate living costs. To put it simply, Trump’s less well-heeled supporters are effectively voting against their own interests.
By Wenyuan Wu for Oilprice.com
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