Fine: Trump and the price of oil and gas

Daniel Fine
Daily Times columnist
Daniel Fine

The most decisive presidential transition since Ronald Reagan 36 years ago is underway.

And the energy future of the country under Donald Trump is expected to abandon what went before.   From alternative energy and the vision of climate change,  this transition will move toward reviving American oil and gas as a traditional and long-term adjunct of  national economic growth and security.

But is it too late for the Four Corners and the San Juan Basin?

Conoco-Phillips has announced it intends to sell its natural gas assets and depart in the next two years.  What is the energy future of San Juan County?

With the Heritage Foundation leading the transition planning as it did for President-Elect Reagan, a regulation rollback will take place.  Hundreds or more executive orders of the Obama Administration will be on President Trump’s desk within hours of the inauguration ceremony awaiting his signature for repeal. A new Environmental Protection Agency and Interior Department leadership will have been designated.

How far,  if it all, the EPA administers National Environmental Protection Act expansion into climate change categories of emissions will be settled as part of the rollback.  Conoco Phillips' San Juan Basin assets should have a higher value without the regulatory cost of producing natural gas.

Yet, how can oil and gas de-regulation impact on the supply and price?

If  lower regulatory costs create a positive cash flow,  operators will benefit.  However,  there is no evidence that supports a connection between less regulation and  higher prices for oil and gas at the wellhead.

Energy bureaucracies are everything.

The Trump appointees in the Interior Department can abolish arbitrary and punitive royalty rate practices which partially caused at least one San Juan Basin bankruptcy.  Trump EPA appointees will administer rules within narrow statutory tradition. President Trump determines the choice of new bureaucrats.

The price and supply of oil is indifferent to Washington and the White House. It is made by a complex combination of supply and demand with financial or trading expectations.  As I have written before in this publication,  OPEC and Saudi Arabia set the price within ranges and produce for global markets accordingly. Trade associations and some industry government representatives fail to understand this partly because of their uninformed, irrational belief in  the“free trade” of oil.

What, then, could President Trump do about the price of oil?

OPEC has decided to reduce production.  The  OPEC cartel decision contained production volumes — how many barrels of oil will be cut and  by which producers?  Look for 850,000 to 1 million barrels  to have a meaningful impact on the price per barrel of West Texas Intermediate, which could end up around $54.

President Trump will have little to say on this.

If Iran and/or Iraq issue assertions of production-at-will all hope of a 2017 moderate recovery will be aborted.

Over-supply and a fall in price to under $40 per barrel will follow. Iran with BP and Total can recover its 1979 level of production at 5.8 million barrels per day.  Iraq can add another million.  This equates to four million barrels in new supply not counting Southwest Shale recovery.  Here is the expanded oversupply that creates the potential of a "Second Downturn" with prices touching $34 per barrel.

This should set the stage for the first Presidential intervention in the global oil market since the 1980s.   In September in Carlsbad,  I was interviewed  by the daily newspapers of Hobbs and Roswell on the rise of foreign oil imports displacing the output of our companies in New Mexico and the Southwest.

I concluded that import quotas would be a policy option for the next president. Inevitably, Trump will consider such quotas by executive proclamation if oil prices have collapsed again.

Such intervention is consistent with Trump’s campaign in which he defended protection for the American steel industry from Chinese steel overcapacity pushing global prices downward. American oil producers, both independents and majors, have an interest in national security status recognition similar to American steel.

President Trump can be expected to engage in personal and direct “negotiating” with a Saudi Arabia prepared to enter global financial markets to raise capital for its economy diversification strategy. Limitations on foreign oil imports are energy tools in an “America  First” foreign policy.

San Juan County and the Four Corners depend on the price of natural gas. No OPEC or cartel exists for natural gas. Price is a function of domestic production and limited liquid natural gas, or LNG, exports.

The  Conoco-Phillips decision to sell is ominous.

Details could include an unbundling of assets approach with its gas separation plant interest going to BP Lower 48  and participation of smaller producers with access to debt that can buy wells.  Perhaps, with prospects of a cold winter raising natural gas prices to more than $4 per thousand cubic feet, a major transaction, similar to Conoco buying Meridian a decade ago, may emerge.

President Trump could intervene to push LNG exports with bilateral trade deals. He would expect support from the Four Corners and its state and federal representatives.

Daniel Fine is the associate director of the New Mexico Center for Energy Policy and State Energy Policy Project. The views expressed in this column are his own.