President Donald Trump took to his Twitter account in late April to criticize the Organization of the Petroleum Exporting Countries (OPEC) for creating oil prices that he calls “artificially very high”:
“Looks like OPEC is at it again. With record amounts of Oil all over the place, including the fully loaded ships at sea, Oil prices are artificially Very High! No good and will not be accepted!”
So, is the president really worried about escalating crude oil prices (the price for West Texas Intermediate, the key marker for U.S. domestic oil, had reached a four-year high on the day he issued his tweet)? And is he prepared to take some public policy action to do something about it? These are both good questions, especially given the fact that President Trump’s tweets are often designed to influence the target to take some action on a completely unrelated issue.
Some things to note about all of this:
• While it is true that the export limitation deal between OPEC, Russia and a few other non-OPEC nations has played a large role in strengthening the price for crude over the last 16 months, it has certainly not been the only factor at play.
• A level of global demand growth for crude that has consistently out-paced projections by the U.S. Energy Information Administration (EIA) and the International Energy Agency (IEA) has also played a major role in drying up what had been a multimillion-barrel-per-day global surplus.
• Trump’s tweet came just a day after Saudi Arabia and Russia agreed in principle to extend the current agreement through at least to the end of 2018, and as the price of gasoline in the U.S. is moving to five-year highs just as the summer driving season is coming around. So, it’s possible the president was simply responding to those related realities.
• But, it’s also important to remember that Trump views everything as a negotiation, and that the United States has very complex relationships with Russia, Saudi Arabia and other OPEC nations related to a wide variety of international matters.
Given all of that, what, if anything, could the president do to influence the global price of crude oil? The answer, quite simply, is not much. Federal law and the U.S. Constitution simply do not offer any sitting president any policy levers that would allow him to quickly influence the price for a commodity that is traded on a global market. In order to lower the price of crude, Trump would have to find a means of either significantly raising global production or lowering global consumption of the product.
The reality is that Trump has already done pretty much all he can do to encourage increased oil production in the United States. Over his first 16 months in office, he and his administration have implemented a long series of policy changes designed to stimulate the domestic oil and gas industry. Those policies have accomplished their intended impact, given that the industry sets new records for production of both oil and natural gas on a seemingly a daily basis.
Past presidents and the U.S. Congress have attempted to temporarily increase crude supply during national emergencies by selling off some of the nation’s Strategic Petroleum Reserve (SPR). The SPR currently contains something in excess of 700 million barrels of oil, which represents roughly 35-40 days of U.S. oil consumption. Truthfully, Trump could put on a fire sale of the entire SPR and it would have just a momentary — and fairly minor — impact on global crude prices. So, there really is not much he could do to quickly increase U.S. oil production, assuming that is even his goal.
That leaves him only two other potential avenues of approach: Reduce global demand for oil or convince the parties to the OPEC/Russia deal to work against their own economic interests by increasing their own production and lowering the crude price as a result.
There is no quick way to negatively impact demand for oil, short of engaging in a full-fledged trade war that would tank the global economy. Of course, no one should think Trump is worried enough about the price of gasoline to engage in that action. No president can simply tell people to avoid driving their cars or going on vacations. So, that’s a non starter.
Thus, the president would be left to try to influence OPEC or Russia to increase their own supply. Here, the array of possible choices is at least potentially fruitful. It could be that the president is setting the stage for trying to influence Saudi Arabia to retreat from its recently expressed desire to raise the Brent crude price into the $80 a barrel range or even higher. Given the complexity of arms, trade and other relations between the U.S. and Saudi Arabia, Trump would have several levers of influence to pull there, if he so desires.
The president would have similar leverage with Russia — he could even conceivably offer some form of reduced sanctions to Vladimir Putin’s government in exchange for increased oil output.
Again, this is all only relevant if the president’s goal here truly is lowering the price of crude. He could be throwing this threat out there in an attempt to gain a concession from one of these countries on some entirely unrelated matter. We have seen him engage in this sort of “Twitter diplomacy” before.
One thing we know for sure: If Trump really is interested in lowering the price of crude oil for longer than a few minutes, he’s going to have to do more than tweet about it, and the policy tools he has available to him are really pretty limited.
The president might also want to keep in mind that, other than California and Colorado, every major oil-producing state in the country voted for him in 2016, and those “red” states are enjoying the higher state tax revenues these higher crude prices are generating.
Take Texas as a prime example. Texas taxes the oil industry at several different levels. It is one of just two states in the country that allows local taxing districts to assess property taxes on the value of crude and natural gas reserves that are still in the ground. Obviously, the higher the price of oil (and natural gas), the higher the tax collections for those local taxing entities.
Texas also levies a value-based severance tax on oil and gas when they are produced. Again, higher prices mean higher tax collections for the state. And, by the way, the Texas Rainy Day Fund, which currently boasts a balance in excess of $10 billion, is funded almost exclusively by those severance taxes.
Texans voted very strongly for Donald Trump in the 2016 election. So did voters in oil states such as Oklahoma, North Dakota, Alaska, Louisiana, Wyoming and Michigan, to name a few.
All of which leads to the conclusion that, in issuing that tweet on April 19, Trump was, in fact, trying to influence Saudi Arabia or even Russia to make a concession on some seemingly unrelated matter. This is just one of the facts of life in the Trump era.
About the author: David Blackmon is the Editor of SHALE Oil & Gas Business Magazine. He previously spent 37 years in the oil and natural gas industry in a variety of roles — the last 22 years engaging in public policy issues at the state and national levels. Contact David Blackmon at [email protected].