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Trump’s Energy Plan – More Volatility for Oil Geopolitics

Shebonti Ray Dadwal is Consultant at the Manohar Parrikar Institute for Defence Studies and Analyses, New Delhi. Click here for detailed profile
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  • December 05, 2016

    As the US President-elect Donald Trump forms his team in preparation of his inauguration on January 20, the policy contours of his administration remain a matter of conjecture. Among issues that have elicited substantial debate are climate change, as it is not clear whether the new US administration will remain as invested in clean energy as the current administration. Under President Barack Obama, climate change had been a priority issue. As outlined in the section on climate change in The Economic Record of The Obama Administration, released by the White House in September 2016, the capacity of renewable energy (RE) from non-hydro resources tripled between 2008 and 2015, while the share of US electricity generation from RE increased from under three per cent in 2008 to seven per cent in 2015.1

    Now, with Trump poised to take office next month, there are concerns that clean technology and climate change issues, in general, may take a backseat, while oil, natural gas and particularly coal may stage a comeback. Trump has never made his scepticism about climate change policy a secret. During the election campaign, he had (in)famously tweeted, “(climate change) was created by and for the Chinese in order to make US manufacturing non-competitive”. He had also declared that if elected, he would pull America out of the Paris Agreement.

    Although Trump has since downplayed much of his contentious campaign rhetoric, scepticism and ambiguity about his likely policy approach on the issue still persists. In an interview with The New York Times on November 23, he did claim to have an “open mind” on climate change issue, that he would study it very carefully, but at the same time also stated that one of the factors that had seen the exodos of 70,000 factories from America was the climate change policy, and that this situation has to be reversed.2 Whether the figures he quoted are based on facts are questionable, but the fact that he has appointed a well-known climate sceptic, Myron Ebell, to lead his Environment Protection Agency (EPA) transition team, and Harold Hamm, an oil man, as a potential Energy Secretary, might be an indication that some dramatic reforms are in the making.

    Whatever be the fate of the US’ climate change policy, there is, however, a general consensus that the fossil fuel industry will benefit under the new administration. During his campaign, Trump had promised that the US would “become and stay independent of any need to import energy from the OPEC cartel or any nations hostile to our interests”, and that allowing companies to drill into untapped natural gas and oil reserves beneath the US land and coastal waters would be a massive economic boon, creating millions of jobs and billions of dollars in revenue.3

    The question now is, whether the revamped fossil fuel-centric energy policy deliver the expected results? And, more importantly, what impact will it have for the global oil market?

    First, although Trump has declared his intention to deregulate the fossil fuel sector in order to make America less energy import dependent, which may bring cheer to production companies in the short term, but over time, this will lead to an increase in supplies in an already over-supplied oil (and gas) market and send prices into a further downward spiral. While production efficiency technology has seen shale oil hold its own at $45-50/barrel, any fall in price levels will once again impact the output. At the same time, it will also impact the RE sector. While it may not stop the momentum in the growth of green technology, it may slow it down as a result of drop in investment for the sector.

    Much of Trump’s attempt at reviving the domestic fossil fuel sector will however depend on how the international oil market reacts. On November 30, the Organisation of the Petroleum Exporting Countries (OPEC) finally arrived at a consensus on market intervention and agreed to cut production by1.2 million barrels a day for six months, starting January 2017, causing Brent crude prices to jump by almost nine per cent overnight to over $50/barrel. Russia too has agreed to cut production by 300,000 barrels a day. But given that higher oil price will benefit the US shale drillers and will lead to more supply in an already over-supplied market, the issue is how OPEC members reached such a consensus.

    Following Trump’s election, the US dollar has surged, causing oil prices to weaken further. Again, with Trump promising to end the US dependence on OPEC and removing regulatory hurdles to the US oil production, prices would have been poised to drop even further. Neither did months of low oil prices have had the desired impact on big shale production. For OPEC producers, it could well be a do-or-die situation. Hence, after Riyadh, which ran $100 billion in deficit in 2015, acquiesced to Iran’s demand to agree to its freezing production after reaching pre-sanctions levels, as well as output concessions for Libya and Nigeria, the deal was made. OPEC is also hopeful that the winter demand will pick up and reduce the oil inventories, which had piled up, due to over-supply and falling demand.

    Nevertheless, there is scepticism regarding OPEC’s ability to abide by production quotas, as well as Russia honouring its promise on output cuts. Furthermore, as shale production recovers, it may not be long before market once again witnesses increased liquidity. But for the six months starting January 2017, if OPEC production is reduced, it may shore up prices for the short term.

    For large fossil fuel consuming countries like India, the prospects of an increase in prices – or volatility -- is not welcome, even if short-lived. Already, some Asian countries are looking for ways to diversify their imports away from OPEC sources, and they may well begin looking up to the US for supplies, to the detriment of traditional West Asian suppliers. Moreover, if Trump carries through with his election promise of re-imposing sanctions on Iran, it may lead to a further tightening of the oil market. This could be a double whammy for India, which recently saw Iran overtaking Saudi Arabia as its largest oil source as Tehran offered discounted prices. If the US goes ahead and imposes additional sanctions against Iran, it may not only impact India’s oil imports from Iran but also its investments in Chabahar, which has only recently started moving forward.

    As of now, therefore, the picture is far from clear. The assumptions about the new US administration’s energy and climate policy are largely based on Trump’s campaign rhetoric, many of which have since been rescinded. Some analysts believe that his priorities may shift once he takes office. What seems almost certain, however, is that the hydrocarbon sector will be a priority for the new US administration, even if the US does not exit the Paris climate deal. This could be a game changer for the beleaguered international oil market and the West Asian politics, which in turn will have a cascading impact on global geopolitics in general.

    Views expressed are of the author and do not necessarily reflect the views of the IDSA or of the Government of India.