President Trump’s Monday tweet that oil prices are too high rattled markets almost immediately. What was the disruptor in chief up to now? Unfortunately, he may have been shooting himself in the foot.
Oil markets became increasingly complex in recent years as U.S. production surged and exports began. The Organization of Petroleum Exporting Countries (OPEC) chose not to respond with production cuts, and prices collapsed from late 2014 through 2017. U.S. companies faced volatility with bankruptcies, layoffs and hard conversations with their financial backers.
{mosads}As prices slowly recovered, oil executives were more determined than ever not to repeat mistakes of the past. Projects would have to generate their own cash flow to fund future investments. Pipelines to evacuate new production would be carefully vetted. The count of drilling rigs operating in the Permian Basin flattened.
Saudi Arabia realized it had contributed to a lose-lose situation and would have to take a new approach. The Saudis reached out to Russia for joint action, creating “OPEC-plus” (OPEC+). Never allies previously, the two nations became bedfellows to ensure that any actions by OPEC’s member countries would not be undermined by decisions in Moscow.
The results were mixed as markets dealt with these new dynamics.
Last fall, prior to the November elections, Trump tweeted about high oil prices, much as he did this week. He didn’t want angry drivers filling up with $4 gasoline on their way to the polls. He suggested he might tap the Strategic Petroleum Reserve to add production.
Saudi Arabia was in an unusually vulnerable position because of the backlash from the murder of Jamal Khashoggi. It didn’t want to take actions that would provoke a response from Washington.
Heavy sanctions were about to be imposed on Iran, but Trump issued partial waivers to accommodate countries as diverse as India and South Korea that depended on Iranian imports. This threw the market into chaos.
Prices had risen on the expectation that the market would suddenly lose 1.5 million barrels per day. When that didn’t happen, prices dropped precipitously.
OPEC+ responded in its traditional way, with production cuts. But the market, twice burned, did not respond. At the same time, global equities took an unexpected year-end fall, adding confusion and closing financing options.
OPEC+ cuts finally led in recent weeks to Brent (European market) prices of about $65, and West Texas Intermediate of $55. Producers in Moscow, Riyadh and Midland, Texas were not thrilled with these prices but could work with them.
U.S. companies also experienced rising costs of production, in part because of new tariffs on imported steel, but they weren’t vocal about it because of the otherwise favorable treatment of the industry by the Trump administration.
The only sure winners from these Trump tweets are oil traders, who thrive on volatility. For producers and consumers, the tweets just create additional uncertainties.
Nonetheless, the U.S. has achieved energy security through increased production, exports of oil and liquified natural gas, growing wind and solar generation and energy efficiency. It’s a good time to let markets do their job, and President Trump should do his best to continue to support an industry that has done much to keep the economy humming.
What’s more, America’s energy resilience has been tested in recent weeks by events in Venezuela. Even though many Gulf Coast refineries were configured decades ago to process Venezuela’s very heavy crudes, the U.S. was free to impose heavy sanctions on the Maduro regime despite knowing they would be forced to divert exports to Asia and India.
This underscores the fact that energy security always means greater independence in foreign policy and should be employed as such by the president.
Bill Arnold is a professor in the practice of energy management at Rice University’s Jones Graduate School of Business. Previously, Arnold was Royal Dutch Shell’s Washington director of international government relations and senior counsel for the Middle East, Latin America, and North Africa.