The Next Big Fight: Trump vs OPEC

During his recent speech at the UN, Donald Trump proclaimed the U.S. would not stand for the OPEC oil cartel “ripping off” the world.

Even as the U.S. puts up more drilling rigs like this and production of oil and gas increases, prices have stubbornly refused to come down. A showdown with OPEC is likely.

Tapping a familiar theme, Trump told the UN assembly that, “We defend many of these nations for nothing and then they take advantage of us by giving us high oil prices. Not good.” The question for the world is: what is Trump going to do about it?

In Trump’s remarks he said the United States was ready to take step to put a stop to further oil price increases. He said the U.S. was “ready to export our abundant, affordable supply of oil, clean coal and natural gas”.

It is a fact that the price of oil is at a four-year high. Prices per barrel are running over $72 for WTI (West Texas Intermediate) Crude, over $81 for North Sea Brent Crude, and also over $81 for what is referred to as the OPEC basket. Just on a yearly basis, that represents a rise of 38% for WTI Crude, 42% for Brent Crude and 47% for OPEC versus prices on September 29, 2017.

It should be noted that prices spiked upwards slightly after Trump’s remarks. That alone should say what the world is fearful of.

What Trump Has Done So Far

The theme of the U.S. flooding the market with cheaper fuel has been one Trump has been pitching for some time. Earlier this year, he and his emissaries have attempted to convince both the EU and China to buy natural gas from the U.S. in substantial quantities. His recent speeches have also criticized Germany, just as one example within the EU, for cutting deals with Russia for natural gas that will leave them dependent. Trump’s team has also tried, without much success, to sell American coal to countries such as China, Vietnam, India and others in Asia which are still highly dependent on coal-burning power plants.

The Trump administration has also done everything in its power to lower the costs of fossil fuel production in the U.S.

Through systematic rollbacks of past Environmental Protection Agency rules, the White House has allowed companies to produce oil and natural gas despite even the EPA itself saying the rule changes would contribute to significant health problems in the United States. The recent proposed changes to methane leak monitoring are just one example of this.

By opening Federal lands to easy and inexpensive oil and gas exploration, the Trump administration has also allowed fossil fuel companies to exploit previously-unexplored areas of the nation for private benefit. The opening up of the 19.6 million acres of the Alaska Arctic Wildlife Refuge to oil drilling – for the first time since 1960 is an example of that. The approval for that drilling came in as a line item in the 2017 Tax Reform Act which gave major tax breaks to corporations and the wealthy.

In March 2017, the White House also made a point of reversing the Obama administration’s block on proceeding with the Keystone XL pipeline. A court recently put that project on hold again for lack of proper consideration of environmental issues when the government approved pipeline routing changes, but that may be just a temporary speed bump in the government’s path to ram through yet another oil supply route.

Despite all that, the price of oil worldwide has stayed high, seemingly defeating what Trump claims is why he was doing all this. He has managed to make the United States the world’s largest supplier of oil in the world but doing so has not kept prices down. The reason is OPEC.

The Organization of the Petroleum Exporting Countries has been on a campaign to slowly grow the price of oil since the 2008-2009 financial crisis drove the price to record lows. OPEC has done this through a carefully-orchestrated plan of limiting output for much of the last 18 months. With those prices having recovered and even grown beyond plans, OPEC recently authorized production increases of around 1 million barrels per day. That has not stopped the long-term global oil price growth but it has slowed it slightly.

What Trump Might Do Next

Increasing the supply of fossil fuels in the U.S. has clearly not worked to bring down prices for the U.S. That was keyed to attempts to sell oil, natural gas, and coal to new overseas customers, as a means of lowering prices worldwide. Partly because of Trump’s abrasive “America First” policy, many countries are wary of doing business with the U.S. The U.S.’s rising waves of international tariffs have also hurt so many nations that few are interested in providing yet another front for America to affect them.

The U.S.’s having isolated Iran, one of the biggest oil producers in the world, with new sanctions soon to go into effect has not helped the situation either. Those sanctions went into place after Trump announced the U.S. was withdrawing from the JCPOA (Joint Comprehensive Plan of Action) agreement intended to keep Iran’s nuclear development programs from going forward. The U.S. government has also taken tough approaches with American allies, particularly in Europe, if they persisted in continuing business relations with Iran.

The new American sanctions against Iran take effect just two days before the upcoming mid-term elections in the U.S. That, plus other market forces, should keep oil prices and gasoline prices high through that point. That is why several financial institutions such as JP Morgan Chase are projecting oil prices could soar to $90 a barrel soon.

One approach the U.S. could consider is to release some of its Strategic Petroleum Reserves. These consist of over 660 million barrels of oil stored in underground containers within the states of Louisiana and Texas. The oil was put there in 1975 after the crippling Middle East oil embargo. Since then the reserves were used to help out during the brutal cold winter of 2000 and after Hurricane Katrina shut down 95% of the Gulf of Mexico’s crude oil production in 2006.

Commerzbank, a major EU bank which is also Germany’s second-largest lender, recently wrote in a report that releasing some of these reserves were “Trump’s only real option … to drive prices down.”

That may be true, but many also believe this would mostly benefit only U.S. consumers and only on a temporary basis. Without a long-term increase in oil supply worldwide or a major decrease in oil buying because of a financial crisis like in 2008, prices are not likely to go down much.

That leaves some other difficult options to consider.

One approach is already in play, which Carsten Fritsch of Commerzbank refers to as “bullying OPEC to raise output”. How the U.S. would attempt to do that is unclear, but Trump’s war of words in this dispute as noted in his comments at the UN this week is a starting point.

Another approach, which some fear may be more than just idle speculation, would be for the U.S. to intervene in other ways to get other nations to increase their production.

One possible pressure point for that is with Venezuela, also a member of OPEC. That country’s oil and gas reserves of 267 billion barrels puts it in third-place in the world after Russia and the United States. Partly by government policy and even more so because of a lack of investment in infrastructure, Venezuela has moved from being the third-largest supplier of oil world wide a decade ago to just in eighth place today. It has suffered significantly because of lack of investments in its legacy oil projects in the Maturin and Maracaibo basins and increasing access to oil transport facilities.

The U.S. could help out the South American nation as a strategic move, but it is hard to imagine that happening peaceably. Venezuelan President Nicolás Maduro is no fan of the United States, in part because of the tough American sanctions in place against his country.

Maduro did make a surprise appearance at the UN on September 26, mostly as he said to “defend his country” against accusations of crimes against humanity. While Maduro told the General Assembly that, “I stand ready to talk with an open agenda on everything that [Trump] might wish to talk about”, he was openly distrustful of Trump. Maduro spoke harshly of Trump’s words just a day earlier to the same group, as he said that, “From this very rostrum a threat was issued yesterday to governments of the world that orders should be obeyed and the U.S. policy should be followed or else those countries would suffer from the consequences.” Those are not the words of someone who would be willing to compromise on anything with the U.S.

Rumors also continue to swirl that the U.S. has this year considered everything from just destabilizing Venezuela to orchestrate an overthrow to possibly invading the country. Most do not believe an invasion is in the cards but some sort of pressure on Venezuela to help out the U.S. by increasing its own oil and gas production is likely. It may not be publicly disclosed but it does make sense for the U.S., both as a short-term policy for Trump and in recognition of the U.S.’s long-standing disputes with the country over human rights violations and its socialist government.

With Venezuela also being a stong ally of its OPEC member nation partners, most of whom want oil prices to continue to float higher for the near-term, it still hard to imagine what the U.S. might offer which Venezuela would listen to.

One way or another, the Trump administration is likely to make one or possibly more moves to do something to bring fossil fuel prices down. The White House has already done about all it can using EPA rule changes and opening up new places to drill, and that has not been enough. So some sort of maneuvering involving the rest of the world and its demand for and supply of oil is likely going to be the target.

It is also all expected to happen or be announced before the date of the American mid-term elections in November.