Trump's Oil Price Dilemma
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.
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.
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.