Trump’s energy dilemma – what does “America first” actually look like?

The chess match begins. Trump’s inauguration speech of a few days ago lived up to expectations. It shouldn’t have been a big shock; after a year of his jaw-dropping campaign speeches was anyone expecting boring?

A general consensus from the speech was: now what? Trump did not wade too far into international relations, other than to reach out to every capital to point out that the old days were over. He made his position clear with respect to foreign trade and how he feels the US has been treated by trade relationships.

Regarding trade deals, some aspects of his speech seem fairly clear (as he has made evident on his website forever). He will be going after China and anyone else he feels has been utilizing cheap labour to steal jobs and dump cheap products on US shores. There are many tentacles to that beast, but the general direction is clear.

For the energy business though, this is going to be very interesting. Trump did very quickly publish an “America First Energy Plan”  that declares a desire to be self sufficient in energy, and to embrace the massive shale and coal reserves the country holds. But it is simple to state those goals; what do they actually mean?

Take the obvious goal to be self sufficient in energy. That can be achieved for natural gas, but oil would take some doing. It would mean encouraging massive development of US shale reserves, offshore drilling, and development of any other nook and cranny that holds oil. But that would only happen if incented by much higher oil prices, for a prolonged period of time. Is that in the American interest? Because a stated goal of the plan is also to stimulate the US economy with lower energy costs. It doesn’t work both ways though. Furthermore, if the US stopped importing its net 5 million b/d and turned it back onto the market, somehow, that would likely crater global oil prices. So the world would have low oil prices while the US had high internal ones. Obviously this is over simplistic, but if Trump actually tried to enact his vision on those terms, such weird speculation is inevitable.

Shale fans will point out that the US can gain 5 million b/d without breaking a sweat. They need to remember that the US averaged 1,400-1,500 oil focused rigs in 2013-14, now less than half that, with oil prices averaging close to $100/bbl at that time. That production generated hundreds of billions to invest in drilling; capital and debt markets added hundreds of billions more. There will need to be higher prices for a good while to attract those rigs or that capital again. And finally, drilling efficiency has improved, but longer laterals clean out sweet spots faster. That is erroneously equated with productivity improvements, which are not necessarily the same thing.

It is not clear at all how Trump can provide low energy prices for US citizens. OPEC still has the ability to manipulate prices at will (despite reports to the contrary. Saudi Arabia alone could send prices spiraling tomorrow by shutting in 2 million b/d, or crater them by announcing an increase of a million per day.).

Given his inauguration speech, it’s hard to focus on anything beyond the topics he so forcefully raised. But there are other things happening in the world, some that he will have to deal with. A big one for Canadians is the Keystone XL pipeline. Trump promised to approve this, great news indeed for Canada, but then that avowed action seems to fly in the face of his threats to tax heavily any import into the US. True, he did not single out oil as a target for duties, but the overarching theme of his speech was that anything the US could provide for itself, it would, and the rest would be shown a cold shoulder. It is debatable if the US can produce enough oil on its own, but it also is true that the US functions well enough now with the Canadian import pipelines already in existence. So yet again we come to a logical impasse.

On the international front, the possibilities are endless and potentially hugely disruptive. Recent theories have contemplated what Russia will get up to now, with Trump vowing not to protect anyone and spitting in NATO’s eye. I wouldn’t want to be Poland right now, or any other nation bordering Russia that Putin would like to take for a concubine. That instability definitely extends to the middle east as well; what will happen without US military ships perpetually hovering around? China is not shy about expansionist policies (e.g., building islands in disputed South China Seas – but on the other hand, I’ve long since run out of hands, Trump’s secretary of state Rex Tillerson laid down a blistering attack on China’s expansionist moves there, meaning…what?). The theories are endless.

Go ahead and write a bunch of comments about how dumb these hypotheses are; I would not stand in your way and might even agree. The point is though that Trump has drawn a few lines in the sand, and building an energy policy that fits within all of them is sort of incomprehensible. It is certainly possible that he hasn’t formulated an energy policy fully yet, and Mr. Tillerson will have valuable input into the tensions and difficulty of the global energy trade.

There is a positive aspect for Canada, that’s come about in an ironic way. There has been a lot of frustration out west that US shale gas is heading north into Canada and displacing western Canadian gas. That has rankled many, but actually may now be an extremely valuable development for Canada – a display that Canada and the US function very well with open energy borders, with both oil and natural gas moving back and forth. Surely that will count for something when the gloves come off, at least for energy producers. I’m not so sure auto manufacturers will get as smooth a ride.