Why the unpredictability of US politics adds to volatility of energy markets
The Opec+ alliance already faces the prospect of reduced demand for its crude next year, with very few members able and willing to cut production
In a fervid Washington, with October temperatures at records of almost 37 degrees Celsius, a geopolitical consultant confided to me that the US administration’s turmoil had made his job easier. In such an unpredictable situation, clients no longer blame him for a mistaken prediction. That applies also to energy markets, where the new risks induced by American policies tug oil prices both up and down.
On the one hand, President Donald Trump’s administration has removed large amounts of oil from world markets. Various sanctions on Venezuela have helped to send its production into free-fall (though none so serious as the mismanagement and looting the government of President Maduro has inflicted on its own country). It has also weighed imposing sanctions on European companies working on the Nord Stream II gas pipeline from Russia which bypasses Ukraine, oddly at variance with the Trump circle’s usual attitude to Moscow, but in keeping with a mercantile desire to foist more US gas on Europe.
With more impact, the US abandoned the Joint Comprehensive Plan of Action (JCPOA) with Iran and sought to drive its oil exports to zero. This has not been fully achieved, but Tehran’s sales have slumped to historically low levels, with only China still buying significant amounts.
Washington has also given an ambiguous response, so quiet as to be almost inaudible, to the attack, likely executed or inspired by Iran, on the Abqaiq and Khurais oil facilities in Saudi Arabia last month. There has been no known retaliation, other than the imposition of some more, by now almost redundant, sanctions.
After the attacks which took out half of Saudi Arabia’s oil production – briefly, as it turned out – the US has not loudly proclaimed its enduring commitment to protecting the free flow of oil from the region. Mr Trump has several times opined that Middle East oil supplies should be guarded either by the countries of the region, or their main customers such as China, not by the US alone.
Oil market analysts in Washington were almost incredulous that such an assault, which would have caused panic even five years ago, did no more than push up long-dated futures prices by forty cents per barrel. The possibility of more strikes or a wider conflict, though hopefully unlikely, surely warrants more of a risk premium.
At home, though the effects will be felt only in the longer term, the administration has rolled back rules on vehicle fuel economy, and drawn back support for electric vehicles, sustaining demand for oil.
Yet on the other hand, a scattering of policies has tended to push oil prices down. By far the most consequential of these is the trade war, or more of a trade brawl, with most of the blows landed by China and the US on each other, but where the EU, Canada, Mexico, Japan and South Korea also take punches. The negative economic effects, a sharp slowdown in manufacturing and trade, and fears of recession, have weighed heavily on oil markets this year. Demand worries are a major reason why prices responded so lackadaisically to the Abqaiq attacks.
The administration has rolled back regulations to encourage domestic oil and gas output. It has also pushed for more liquefied natural gas (LNG) exports, even though the groundwork was done under president Obama. Chinese retaliatory tariffs, though, and now sanctions on some leading Chinese tanker companies, have almost dried up American fuel shipments to this key growth market. And US shale producers are worried more about low prices and a drying-up of capital than regulatory tweaks.
The other looming cloud for the oil market is the prospect that Mr Trump might strike a deal with Tehran, a rebadged JCPOA, or at least issue sanctions waivers as a way of encouraging negotiations. President Emmanuel Macron of France has energetically promoted such ideas, and the recent departure of hardliners such as national security adviser John Bolton and sanctions enforcer Sigal Mandelker reduces opposition within the administration.
Mr Trump, too, would welcome a divertion, something that could be presented as a foreign policy win, to distract from the ever-widening impeachment inquiry over Ukraine. But bringing 1 million barrels per day or more of Iranian crude back on the market, as demand weakens, would cause a price crash into 2020. The Opec+ alliance already faces the prospect of reduced demand for its crude next year, with very few members able and willing to cut. Accommodating Iran would bring even greater strain.
These various offsetting factors have, overall, pushed prices down. Of course, increasing or decreasing energy prices is far from the only or main US aim. The Obama administration also both dealt with and sanctioned Iran, took Libyan oil off the market, and boosted US production. But it is the unpredictability and incoherence of current American politics that makes its impact on oil and gas markets so volatile. A second Trump term will be yet more chaotic.
If the next president is not Donald Trump again but another, they will face longer-term fallout. The US-Iran relationship will continue to be problematic, even with a JCPOA stitched together again. There is still time to rescue the multilateral trading system, and a possible recession would be a painful yet transient factor of the type the oil market has faced many times.
The biggest problems will be threefold. The long-term erosion of US capability, credibility and commitment to agreements undermines everything else, whether collective security, climate, or a united front on free and fair trade. There is little appetite for tackling problems militarily but overdosing on sanctions causes them eventually to lose utility. And the four lost years on climate promise a more radical, necessary but disruptive “green new deal” from a president Bernie Sanders, Elizabeth Warren or another.
Robin M. Mills is CEO of Qamar Energy, and author of The Myth of the Oil Crisis
Updated: October 6, 2019 12:18 PM