The implications of a Trump presidency for the oil markets are hard to discern, given the unpredictability of the new administration. But a few possible scenarios are worth considering.
The first is the most obvious. Trump and his Republican allies in Congress will do all they can to preside over a drilling boom. That will mean repealing regulations – the Congress is introducing legislation this week to kill an Obama era executive order on methane emissions from oil and gas wells drilled on federal land. It will presumably result in the opening up of territory for new drilling both onshore and offshore, from the Atlantic Ocean to the Arctic Ocean and everywhere in between. The oil-friendly campaign could also result in trying to undermine competing technologies to fossil fuels, by scrapping incentives for renewables and withdrawing from the Paris Climate Change Accord.
The result could be much more U.S. oil supply – great news if you are an oil and gas company. But that could also lead to downward pressure on prices, so it is not entirely clear that the story ends well for the industry on balance.
The unleashing of the shale industry could also create another problem: in the face of unrelenting U.S. supply, OPEC could abandon its plan to cut production. Weary of losing evermore market share to higher-cost producers, undertaking painful cuts only to cede ground to rivals, OPEC could call it quits and produce at maximum levels again. That would certainly lead to another downturn in oil prices.
A third ramification of a Trump presidency is on the ability of oil and gas companies to move freely around the globe. President Trump’s stringent immigration policy has created confusion and chaos at airports around the world in the last few days. While the effect on the oil industry specifically is a minor story compared to the broader humanitarian fallout, it is nonetheless something that companies have to worry about. Bloomberg reports that Halliburton warned its employees not to travel to the U.S. if they come from one of the seven countries listed under the administration’s new immigration crackdown. Related: Post Oil Bust: What Lessons Have Petrostates Learnt?
For the second largest oilfield services company in the world, immigration restrictions can be a big headache. And the same goes for oil companies large and small. The oil industry is global and multinational by nature, moving from country to country to drill new projects. Unlike a manufacturing company, it is not as if an oil company can decide where it locates its extraction – it has to go where the oil is. And that means employing people from around the world as well. “Oil and gas is going to have the most heartburn from this,” Michael Webber, deputy director of the Energy Institute at University of Texas at Austin, said in a Bloomberg interview. “Other parts of the energy sector, like the electricity sector, are more domestically situated with its workforce and its assets.”
Making it difficult for a few dozen people from the Middle East to come to Houston may not seem like a crisis, but the Trump administration probably did not fully consider the fallout. Iraq’s parliament is considering a ban on U.S. nationals from entering the country, a decision that could negatively impact companies like ExxonMobil, which has a half million barrels of oil production in Iraq. Surely, incoming Secretary of State and former Exxon CEO Rex Tillerson was not consulted before the executive order restricting immigration from Iraq was issued.
Adding one more confusing factor the mix is the possibility of major changes in U.S. economic policy. For example, the proposed border-adjustment tax would put a tariff on imports and make exports tax-free. The details of this were explored in a separate article, but suffice it to say that the move would severely disrupt the oil industry, favoring domestic U.S. drillers at the expense of foreign ones, hurting some refiners, impacting consumers in the U.S. with higher gasoline prices, and so on. The full consequences of a border tax are difficult to predict, but they would be enormous. The border tax would be a heavy lift politically, so its passage is far from assured.
More likely are a combination of corporate tax cuts, income tax cuts, and a potential ramp up in infrastructure spending. “While the impact of these potential policy actions on growth is debatable, the implications on commodity pricing is mostly in?ationary,” Goldman Sachs wrote in its latest commodities report.
Tax cuts and higher spending, combined with deregulation in the energy sector, could increase inflation and push up crude prices. However, that outcome assumes the success of the Republican-controlled Congress in pushing through its agenda, and it also forgets to include the reaction of the U.S. Federal Reserve. Presumably, high inflation would be met with a ratcheting up of interest rates, which would strengthen the dollar and cancel out the bullish effect on oil. On balance, it is hard to gauge the exact effect of economic policy changes on oil prices. Related: Why Is Everyone So Bullish On Oil?
Finally, there are questions that are much more speculative in nature regarding the Trump administration’s bellicose approach to foreign policy. Chinese military officials recently warned that war with the U.S. is becoming “a practical reality” because of the new administration’s confrontational approach. President Trump has already upended longstanding U.S. policy by taking a phone call from the President of Taiwan, ruffling U.S.-China relations. Contemplating an actual war between the U.S. and China is so horrific that many assume it won’t happen. And it probably won’t. But the Trump administration is nothing if not unpredictable. At a minimum, a trade war between the world’s two largest economies is very possible, something that would hurt both countries and certainty cut into oil demand.
A more realistic scenario is the Trump administration scrapping the Iran nuclear deal. That would put both countries back on a war footing, and raise tensions. At the same time, the U.S. would have great difficulty reassembling the international coalition that put sanctions on Iran. Tearing up the deal would burn a lot of bridges among even the U.S.’ closest allies – something that is already underway – and so the Trump administration would have to go it alone in its effort to re-isolate Iran. The effort would surely fail, but could make it difficult for Iran to attract investment for new oil development.
All told, while most are focusing on energy deregulation and potential tax cuts, the Trump administration is a huge wildcard for the oil industry.
By Nick Cunningham of Oilprice.com
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