The Good, the Bad, and the Risks
As Donald Trump returns to the White House, his energy policy promises to shift focus toward maximizing US oil and gas production, signaling a potential boost to fossil fuel sectors. However, analysts caution that the broader economic effects, especially from a potential trade war and tariff increases, could dampen the outlook for global oil demand. This complex scenario involves a mix of opportunities and risks for US energy, oil markets, and global trade relationships.
The Good: Expanding US Oil and Gas Production A major feature of Trump’s energy agenda is to streamline the permitting process for oil and gas exploration, which could accelerate US fossil fuel production. Under his previous administration, regulatory rollbacks encouraged more drilling, particularly in onshore oil and gas fields in the Lower 48 states, like the Permian Basin. Trump’s second term could see further efforts to simplify the permitting process and eliminate barriers to development on federal lands, which could benefit exploration and production companies (E&Ps).
Analysts suggest that Trump’s policies might encourage fresh investments in US oil and gas by increasing investor confidence. According to Simon Flowers, chief analyst at Wood Mackenzie, "conditions to raise fresh capital could improve because investors perceive less terminal value risk under an oil- and gas-oriented Washington." Additionally, deregulation could open the door to new mergers and acquisitions (M&A) in the oil and gas sector, potentially driving further growth in private E&Ps. However, while there may be a slight boost in production, particularly from smaller operators, the overall impact on major US producers may be limited in the short term.
Under a second term, Trump is expected to push for further deregulation and expand exploration, particularly on federal lands and offshore areas like Alaska’s Arctic National Wildlife Refuge (ANWR), which was blocked under President Biden. According to the Trump campaign, this approach would allow the US to increase its fossil fuel production significantly. "We can expect the US to maintain its position as the dominant global oil and gas producer," said Ed Hirs, an energy fellow at the University of Houston, pointing out that US companies will continue to respond to market signals and price trends globally.
The Bad: Weaker Global Oil Demand Due to Higher Tariffs While US oil and gas production could rise under Trump, the broader economic impacts of his proposed trade policies may outweigh these benefits. Wood Mackenzie’s analysis suggests that the tariffs Trump plans to implement could significantly weaken global oil demand, projecting a decrease of up to 500K b/d in 2025. These tariffs, particularly if they target China, could result in slower economic growth both in the US and globally, which would reduce energy consumption. As Flowers notes, "A Trump administration means radical changes for tariffs on imports, climate policy, and international affairs."
The ripple effect of these tariff-induced declines could soften oil prices by as much as $5 to $7/b. Weaker global demand may also put pressure on the refining sector, with companies facing reduced margins, especially if global consumption stagnates. However, US refiners might outperform their global competitors due to the protective nature of US tariff policies, which could shield domestic producers from foreign competition.
The Risks: Geopolitical Tensions and Global Oil Price Volatility and Uncertainty in Green Projects
In addition to the economic risks of higher tariffs, Trump’s return to the White House could exacerbate geopolitical instability, leading to further volatility in global oil markets. The ongoing conflicts in the Middle East, particularly the rising tensions between Israel and Iran, present risks of supply disruptions that could drive oil prices up. In such scenarios, Brent crude could temporarily reach $90 to $95/b, as seen in projections by?Goldman Sachs. If Iran’s oil supply is disrupted—potentially by US military actions or escalating sanctions—spare production capacity, largely concentrated in the Middle East, could struggle to fill the gap, leading to price surges.
Trump’s administration, having supported more aggressive foreign policies in the past, might increase these tensions, especially in the case of a military conflict involving Iran. If global oil supplies are significantly affected by these geopolitical risks, oil prices could spike, benefiting US producers in the short term, but potentially straining global markets and affecting consumer prices.
One of the most significant risks to the US energy sector under Trump’s policies involves China’s reaction to any renewed tariff wars. After the US imposed tariffs during the trade conflict in the late 2010s, China retaliated by reducing its imports of US goods, including LNG. While China remains a key player in global LNG markets, accounting for a substantial share of US LNG exports, ongoing tariffs could prompt China to source more natural gas from other countries like Australia, Qatar, or Russia, diminishing the US's market share.
If China decides to cut back on LNG imports from the US, as it did during the trade war, US exporters could face severe consequences. According to Kpler, Europe is the largest market for US LNG, receiving nearly half of all shipments in 2023. A significant shift away from US LNG by China would not only harm US exporters but could also escalate tensions between the two largest economies, further destabilizing global trade.
Moreover, higher tariffs could lead to increased prices for oil and LNG in the US, which would be passed on to consumers. Wood Mackenzie’s Flowers points out, "Tariffs could lead to higher costs for oil and gas companies," which would likely trickle down to consumers. As the cost of energy rises, US consumers could face higher fuel and utility bills, which could reduce disposable income and dampen economic growth.
The US still imports oil to satisfy its demand despite being a major oil exporter. Additionally, the US still imports small quantities of LNG, mostly from countries like Trinidad and Tobago, Qatar, and Nigeria, but its reliance on these imports has significantly decreased in recent years due to increased domestic production. At the same time, the US has become a major LNG exporter and is now one of the world's leading LNG suppliers.
While Trump’s pro-oil policies could spur domestic fossil fuel production, the effects on the clean energy sector are more complicated. The Inflation Reduction Act (IRA), passed during Biden’s administration, has provided substantial tax credits and incentives to encourage investment in renewable energy projects like solar and wind. The law’s provisions are likely to remain difficult to repeal, especially with broad bipartisan support for clean energy in certain regions of the country.
As Carl Fleming, a partner at McDermott Will & Emery, noted, the economic benefits of the IRA, particularly in red states that have benefited from clean energy jobs, will make it politically challenging to fully reverse Biden’s energy agenda. Trump could potentially slow the pace of the transition by limiting the funding or scope of federal clean energy programs, but "I don’t think it would have a shocking effect," said Fleming, suggesting that the momentum in the renewable energy sector is already well-established and unlikely to be derailed entirely by a change in administration.
Trump’s potential executive actions could include limiting the availability of federal land leases for renewable projects or cutting budgets for clean energy initiatives. This would likely result in slower growth in renewable energy compared to what was envisioned under Biden’s policies. However, experts like Ed Hirs argue that the renewable transition is already “well underway” and that even a Trump administration could not fully undo its trajectory.
To sum up, Trump's return to office is poised to shape US energy policy in ways that could significantly impact both domestic production and global markets. On the one hand, deregulation and increased support for fossil fuel development could boost US oil and gas production, with potentially favorable conditions for US producers in the domestic market. On the other hand, escalating trade tensions, particularly with China, could undermine global oil demand, affecting US exports and leading to higher energy prices for consumers.
As geopolitical risks remain high, particularly with tensions in the Middle East and potential disruptions to oil and gas supplies, the US energy sector faces both opportunities and significant risks. Any trade conflict could force US exporters to redirect shipments to other markets, which would likely incur higher shipping costs and longer transit times. Ultimately, the impact of Trump’s energy policies will depend on how the administration navigates these complex economic and geopolitical challenges. Furthermore, its policy may impact ongoing green projects supported by the Biden Administration. (November 4, 5, 7, and 8, 2024)
Source: Global Oil Market Weekly Updates, November 11, 2024/ www.opportunitycrudes.com
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