Fine: The next president and the price of oil

Daniel Fine
Daily Times energy columnist
Daniel Fine

What would  a President Donald J. Trump mean to the price of oil?

So far,  he has not campaigned on a new energy policy. The expectation is that Harold Hamm of Continental Resources would be nominated as the Energy Department secretary since he is the energy advisor to Trump’s campaign. Is there an expectation that the oil price will rise on a speculative or psychological market move?

Yes,  there could be $ 60.00 per barrel West Texas Intermediate in overnight trading on Nov. 8. A President Trump would break the $52 to $39 price range since June on the upside. Investment which was on the sidelines will have completed its re-entry mainly in the Permian Basin and with lenders trickling into the San Juan Basin and the Rocky Mountains.

What would happen in the first month of President Trumps term?  The Democrats in the Senate would reject the nomination of candidate Hamm whether as a majority party or as the minority party, which they are now. Trump would remove President Barack Obama's executive orders that are oil-price sensitive. Now the hard part.

Would Hamm or the secretary of state defend American oil production in the Southwest or shale oil effectively through an understanding with Saudi Arabia and the Gulf nation producers? Would he have a Jim Baker to do this?  He could deploy oil import restrictions or quotas to defend a threatened domestic industry and national security.

By next year Saudi Arabia will have sold at least 10 percent of its state-owned Saudi-Aramco to worldwide funds and institutions. Its selling of sovereign debt will have met 2016 revenue shortfalls and its subsidies in the social order of the Kingdom will be resumed.

Expectations of $82 per barrel oil will dominate the CNBC morning talk. The talk will be, "buy oil before its too late" or "don’t miss out on $100."   This will be a strategic threat to Saudi-Gulf market share and the beginning of a "Second Downturn" by late summer of 2017.

More rigs would have returned, energy bank lending to operators or wildcat entrants will be back in business, and a new or reassembled workforce would be partially back on the job.

The environment of the Second Downturn will be a stronger dollar and higher interest rates. But most important is the issue of American production volumes from shale technology as a threat to Saudi-OPEC. This depends on the revival of demand for oil worldwide.

Saudi Arabia believes a demand recovery would occur as President Trump moves through his first year but certainly by his second. It intends to control the uptick in world demand for oil through preparatory capacity expansion to meet the demand with cartel management of production volume. This is the price war and market share which we have lived through since late 2014. The Second Downturn will have emerged.

Once again,  the American oil industry on the verge of oil self-sufficiency must deploy new technology enhancement and more production.  Because the industry is not controlled by a state-owned oil company but rather a hundreds of competitive producers whose only discipline is price sensitivity, Saudi-OPEC  will react to lower the price of oil.

If it is President Clinton,  the last thing on her agenda is concern for the Southwest shale oil industry.  She has followed Sanders on climate change to attract his voters.   But she is ultimately on track to revive the center-left in American politics.   Climate change from that position is a natural gas replacement of coal, an embrace of electric cars, and more emissions regulation. No banning of hydraulic fracturing .

Climate change will be implicit instead of declaratory. The key is who will be placed to execute and monitor in the bureaucracy.  She will talk to Carol Browner who served in Bill Clinton administrations.  If not Browner,  then someone like her.

What to do about the price of oil?   Higher prices stimulate alternative fuels.  Lower prices postpone such investment against the Al Gore doom announcements.   Her administration
would explore the acceptance of the Saudi-OPEC supply strategy as useful in climate change policy.  Accordingly, lower oil prices lead to lower domestic production and indirectly to decarbonization.

In Singapore oil trading on election night,  some selling would prevail as news of Clinton’s victory circulates.  This would accelerate the making of the Second Downturn. No doubt 
the American oil companies that are public companies or traded on stock markets would be sold on the basis of investor risk in the climate change exposure of oil and gas assets, refining, and transportation (pipelines).

Our election will have little or at best temporary impact on the global pricing of oil. The Asian market for Middle East oil makes what happens in the U.S. historically less important and
the choice of a president an overnight trading market event.

The San Juan Basin “bust” can  only partially recover with services and drilling similar to pre-2006 conditions before the Second Downturn sets in. This is  the target of Saudi Arabia- Gulf nations “normal” in the “balance” of supply and demand. American production, mostly from shale technology, has lost nearly a million barrels per day of production in two years as a consequence.

Saudi Arabia and Russia can agree on production freeze accords, but who will cheat and where Iran and Iraq will be remains to be answered.

Daniel Fine is the associate director of the New Mexico Center for Energy Policy and senior energy analyst for the state of New Mexico. His analysis reflects an independent view apart from those institutions.