You really can have too much of a good thing. Or a bad thing. Or just a thing. By “thing,” I am referring in this case to President Donald Trump’s support for the energy industry. Trump is all in on developing America’s bountiful supplies of oil, natural gas and coal. This is what miners and drillers (and pipeline operators and refiners) want. At this juncture, though, it’s not necessarily quite what they need.
Meanwhile, Friday morning delivered what has become a rather familiar set-piece: A tariff tantrum in oil prices. China’s announcement of new tariffs on another $75 billion of US goods, including oil, took what had been a tentative rally in Brent crude above the $60 level and dunked it back down below.
This is the problem with Trump’s support: He is all about boosting supply. When it comes to demand, however, his broader agenda rather gets in the way.
Trump’s “energy dominance” plans are informed by his trade policy in so far as higher fuel exports cut into those trade deficits that bother him so much. In addition, red states (those where Trump won the popular vote in 2016) account for more than 80 per cent of the country’s oil, gas and coal production, as well as almost three-quarters of its refining capacity, according to data compiled by ClearView Energy Partners, a DC-based analysis firm.
So Trump has compelling reasons linked to his signature issue and his political survival to try to boost energy supply, and this informs many of his administration’s policies and proposals. He wants to open up more federal waters as well as the Arctic National Wildlife Refuge to drilling. Under Trump, the Environmental Protection Agency is pushing for changes to a provision of the Clean Water Act to make it harder for states to block the construction of new pipelines. Similarly, he has signed executive orders aimed at streamlining approval of cross-border pipelines (maybe with this one in mind) as well as seeking ways to further curb the states’ say over permitting. On the other hand, Trump is all for state regulation of methane leaks at oil and gas facilities, planning to end direct federal regulation of this potent greenhouse gas.
The common theme here is one that resonates with many Republicans in general and the fossil-fuel industry in particular: Dismantling regulation. Its practical effect is to make it easier, and thereby cheaper, to produce more of these fuels. Yet you may have noticed there isn’t exactly a shortage. One of the reasons oil, gas, and coal producers are so utterly friendless in the stock market is because of a pathological desire to continuously boost output and invest in new deposits to the point where they trash returns for shareholders.
Trump proves less of a reliable friend when it comes to the other side of the equation: Demand. His attempt to overturn vehicle fuel-efficiency standards — and put California in its place — has resulted in several prominent vehicle manufacturers deserting him for a deal with Sacramento (much to his tweeted chagrin, of course). Meanwhile, Energy Secretary Rick Perry’s various efforts to engineer a bailout of struggling coal-fired power plants, as well as nuclear ones, have run into the thorny issue of being deemed utterly unnecessary.
Above all, Trump’s trade policy ensures that, even as he encourages more freedom molecules and other flag-toting fossil fuels, he is undermining the markets best placed to take them. China alone is forecast to account for 42 per cent of the growth in global oil consumption between 2018 and the end of 2020, according to the Energy Information Administration. The prospect of exports of liquefied natural gas is the main thing keeping gas futures above $2 per million BTU. Similarly, coal miners would be in even more pain were it not for the recent increase in exports. America’s own energy consumption has risen somewhat in recent years, but this is not a growth market.
The energy industry should view Trump’s increasingly shrill calls for the Federal Reserve to salve the wounds of the trade war with lower interest rates as similar to OPEC’s ongoing supply cuts. They are both nominally bullish stopgaps that are actually bearish signals of weakening fundamentals.
Energy, especially oil, is an industry that grew up on globalisation. Yet every week brings further evidence of America’s increasing disinterest in supporting that particular status quo. It isn’t just trade. Japan and South Korea, two US allies in an especially dangerous part of the world, are now engaged in an escalating spat that would once have been snuffed out by the smothering blanket of US diplomacy. Trump has also signalled his disinterest in upholding the Carter Doctrine, even as he engages in brinkmanship with Iran. And of course, there is the confrontation with Denmark to think about.
A policy of boosting output into a weakening market only leads to one outcome when it comes to prices. And there is an added, more insidious risk for the fossil-fuel industry in this environment.
Earlier this week, my colleague Jennifer Dlouhy reported on a lobbying effort involving several large energy firms — including one linked to a certain tycoon whose death was announced Friday morning — that has resulted in nine states effectively criminalising demonstrations against pipelines. While it fits neatly with Trump’s own efforts to ease the path for pipelines, it is hard to imagine anything more short-sighted. One wonders why the firms lobbying for this expect trials of protesters will either a) actually prevent protests, or b) bolster the industry’s credentials. Like the president’s policies, this is old-school thinking so blindly focused on the supply end of things that it forgets about the other: Winning over the customer and, ultimately, society.
The writer is an investment banker and former editor of the Wall Street Journal.©Bloomberg