POST 2016 PRESIDENTIAL ELECTION

As indicated in the Pre 2016 Presidential Election paper which analyzed the oil market in context with the Middle East mess, the actual election results portend a massive shift in possible projected outcomes in the world oil market as well as U.S. foreign policy relating to the Middle East. The Trump victory will have a massive impact on both the free market decision making that drives domestic production as well as on the posture of U.S. Middle East policy that will significantly influence Saudi (and, therefore, OPEC) crude oil output decisions. Even though the following discussion will appear to be broken down into sections relating to the impact on the domestic oil market of the Trump victory and the concurrent shift in OPEC/Middle East realities, the overlapping of the sections is inevitable due to the intertwining of domestic and OPEC oil output decision making.

The impact of the Trump victory on the domestic oil market over the next four years of his administration should be substantial. Not only will all of the oil pipeline and other energy infrastructure projects be permitted in a timely manner, Federal lands will become more accessible to oil and gas producers. This will allow for the expansion of oil and gas production in the United States, with low cost projects that generate minimal environment concerns being the obvious initial choices. Coal power plants will not be prematurely forced off line due to aggressive EPA regulation. President Trump has made energy independence a priority which is long overdue. In addition, as discussed in detail in the pre-election paper, fracking is here to stay and production costs have gone down substantially. Due to the demise of high cost fracking projects and the significant efficiency increases attributable to technological advances, the average cost of fracking in most basins (e.g. Brakken in North Dakota and Permian in Texas) is presently between $30.00 and $40.00 per barrel. At the present time (end of Q1 2017), with the price of Oil (WTI) at approximately $50.00 per barrel, last years’ trough in the national rig count is being reversed and, consequently, also the projected levels of shale oil production.

The Trump Administration’s Middle East foreign policy is expected to be significantly more aggressive relating to ISIS, Iran and Syria, and more supportive of Israel, Saudi Arabia, Jordan and Egypt and all other traditional Middle East allies. Given this apparent shift in U.S. foreign policy relating to Middle East affairs, the Saudis must inevitably perceive that they have more options in dealing with the threat of Iran, Syria and their allies to their dominance in the Middle East. The Saudi decision, starting in 2014, to keep oil production stable (supply) in the in the face of weakening global growth (demand), as discussed in the Pre 2016 Presidential Election piece, has taken a major toll on the Saudi Sovereign Fund. That geopolitical decision which was made, in part, to cripple Russia, Iran and their allies in the Middle East by crushing the price of oil, diminished in importance as a power play going forward after the Trump victory. Their plan to initiate an IPO (initial public offering) to sell up to a 5% share of Aramco is intended help replenish the Saudi Sovereign Fund. They can be expected to do everything in their power to maintain stability in the world oil market leading up to the IPO. After that point in time there will be less incentive for them to prevent the supply of oil on the world market to outpace demand.

At the present time and for the foreseeable future, the Saudis’ capability and incentive to prevent the price of crude oil from dropping significantly leading up to the Aramco IPO, is significantly greater than the incentive, as well as their capability, to drive the price of crude up substantially from its current level. There are a number of factors that would make such an endeavor prohibitively costly. First, the Saudis will be on their own without the long term cooperation of the other OPEC members. As the Saudis are all too aware, enforcing long term cooperation among the OPEC members is much like ‘herding cats’. Given the increased efficiency of fracking, as discussed above, coupled with the long standing goal of energy efficiency espoused by conservative economists and adopted by the Trump Administration, it is inevitable that U.S. production will continue to grow steadily unless the price of oil drops precipitously (i.e. at or below $30/bbl). It is more likely, however, even if it is assumed that global economic growth continues to be slow, that the price of oil (both WTI and Brent) will stay, for a vast majority of the time, in the range of $50.00 $10.00 for the foreseeable future. The OPEC members have already demonstrated that they cannot withstand crude prices in the $30.00 range for more than a short period of time, and have taken action to stabilize the oil market when faced with that situation. U.S. production will continue to grow and should be able to prevent the global demand for oil from significantly outpacing global supply in the foreseeable future (at least 3-5 years) except in the highly unlikely case of a near term global economic boom (i.e. significantly greater than 4.0% sustained annual growth).