His own policies have helped lift prices, and blustering won’t solve it.
5
President Donald Trump indulged in a little “energy dominance” this weekend. In the process, he showed who really has the whip hand.
Trump’s Saturday morning tweet announcing Saudi Arabia would be raising oil output by two million barrels a day surprised everyone, not least Saudi Arabia’s leadership and the president’s own staff. The subsequent walk-back was a hurried, stumbling affair. And the damage was done anyway.
Because, really, nothing says “energy dominance” quite like pretending on social media that an ally will boost their oil production in order to head off the domestic costs of one’s own foreign policy.
The White House finds itself in a quandary of its own making. Having effectively torn up the nuclear deal with Iran and apparently gunning to reduce that country’s oil exports to zero, Trump has teed up a jump in U.S. pump prices timed exquisitely for November’s midterms.
Saudi Arabia’s quid pro quo of engineering a commitment by OPEC and its associates to raise oil production by perhaps a million barrels a day doesn’t appear to be enough to forestall this. Besides Iran, there is Venezuela, Libya and even bottlenecks in Texas spooking the market. Hence, Trump’s less-than-honest-or-informed tweet and Saudi Arabia’s subsequent assurances that it has the capacity to keep a lid on prices even if it isn’t opening the taps just yet.
All quite farcical, yes. But usefully so.
Far from being dominant, the U.S. isn’t even energy independent, especially when it comes to oil. Exports have shot up, fueled by the shale boom. But the country still imports more than 2.5 million barrels a day of crude oil and refined products on a net basis. Taking crude oil alone, it’s a net 6.5 million barrels a day. The East and West Coasts depend on shipments of foreign oil to offset the logistical hurdles of getting oil from the Midwest. Meanwhile, certain grades of oil, especially heavier ones craved by Gulf-Coast refineries, must be imported. (Ironically, North America as a whole is much closer to being energy independent — but maybe we shouldn’t mention that.)
States of Dependence
U.S. net imports of oil are way down from their peak, but still amount to millions of barrels a day
Source: Energy Information Administration
Trump’s awkward attempt to display dominance reaffirms this underlying truth.
It also made a mockery of OPEC. The organization’s recent meeting was a carefully choreographed exercise in obfuscation, projecting cohesion even as Saudi Arabia and a few other countries effectively capitalized on the weaknesses of others and the imminent sanctions on Iran. OPEC was founded 58 years ago to break the quasi-colonial control that Western oil majors exerted over the exporters’ economies. This weekend, the U.S. president laid bare his bargain with Saudi Arabia aimed against fellow co-founder Iran.
Even if that merely confirmed the obvious, it does present Saudi Arabia with some complications. First, the next OPEC meeting will be that much harder to manage. Second, the president’s intervention bolsters the main argument against a high valuation for Saudi Arabian Oil Co., or Saudi Aramco, should its IPO ever happen: namely, its dual identity as a commercial enterprise and an arm of the Saudi Arabian state, raising its risk premium. And third, it sets up a situation in which Saudi Arabia may have to prove its vaunted spare capacity is the real deal.
Trump isn’t the first president to worry about rising pump prices. But he has made American energy a symbol of his radical remaking of the country’s relationship with the rest of the world.
In this instance, however, the objectives of removing Iran’s oil from the global market while keeping gasoline affordable in battleground states are irreconcilable. Don’t be surprised if the agitation evident in Saturday’s tweet morphs later this summer into outright intervention with a sale of barrels from the Strategic Petroleum Reserve. If dominance isn’t an option, we can probably expect disruption.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
