Oil, gas, and renewable energy markets will face high levels of uncertainty and potentially extreme volatility under a Trump administration in 2017. Some of these uncertainties flow from questions about the new administration’s policies on energy production, trade, and climate policy. Others flow from the basket of national security risks that a new US President was destined to inherit. Yet it is Mr. Trump’s signaling of major shifts in US foreign policy priorities that may have the greatest near-term impact on energy supply and demand. The impact of these uncertainties, following two years of reduced oil and gas investment and low energy prices, may inhibit investment and sow the seeds of a potential oil and gas price shock by 2020, if not sooner.
The domestic energy policy
A rash of executive orders, appointments and revocations of Obama era rules under the Congressional Review Act give a robust preview of President Trump’s energy policies. He seeks a broad retreat from regulations seeking to reduce greenhouse gas (GHG) emissions (and thereby costs) in the energy sector. These changes include undermining the Clean Power Plan, easing restrictions on coal production externalities, revoking GHG testing for new infrastructure permits, avoiding new regulation of methane from existing sources of emissions, and potentially withdrawing from the Paris Agreement and regional agreements to reduce GHG. Congress has reversed regulations that are less than a year old through the Congressional Review Act (CRA). Rules include the Bureau of Land Management Venting and Flaring Rule, the Five-Year Plan for Offshore Oil and Gas Drilling, and the Department of the Interior’s Blowout Prevention and Well Control. Trump aims to increase US energy supply: he has pledged to open federal lands for coal leasing and expand oil and gas leasing. Questions remain about a Trump administration’s decision on new fuel efficiency standards. Approving Keystone XL and other US-Canada pipelines is also high on the Trump agenda. While Mr. Trump has issued Presidential memoranda on both pipelines, construction is unlikely to begin on KXL until state level issues are resolved, the route finalized and national environmental laws are complied with.
The White House trade policy
President Trump’s pledge to impose higher tariffs on China and Mexico, revise NAFTA, disfavor regional trade agreements, and potentially withdraw from the US-Korea Free Trade Agreement (and even the WTO) all suggest a period of high uncertainty in the future of global trade agreements.
Energy markets could be affected in multiple ways. US liquefied natural gas (LNG) exports could be harmed if trade policy reduces the number of countries to which exports are deemed to be in the national interest, rather than requiring a special determination. Many key Trump administration transition leaders at the United States Trade Representative (USTR) opposed liberalizing LNG exports because of their belief (widely disproven) that exports would adversely impact domestic electricity prices. Mr. Trump could withhold approval for new export permits unless asymmetrical political concessions were granted by the country in question. Alternatively, Mr. Trump could expand the number of countries with free trade agreement status through bilateral agreements. Mr. Trump has filed a notice to withdraw from NAFTA, which could freeze upstream investment in Mexico and destabilize its economy, crushing demand for US petroleum products, light oil, natural gas, energy services, and power generation equipment. While renegotiation is likely, actual withdrawal from NAFTA would remove investor protections that are essential to US investment in Mexico’s deep water and other energy auctions. A border adjustment tax on Mexican imports could have a similar impact, though the political prospects for passage are poor.
Towards an era of instability?
Mr. Trump’s policies and outcomes will be shaped by White House and agency personnel; influenced by Congress, including Republicans who favor trade and some level of environmental protection; mitigated by the US judicial system; ameliorated by the long term investment vision and risk tolerance of US utilities; and may face intense backlash from citizens, partner nations, and even energy producers. Because of this, it is unlikely that any of Mr. Trump’s domestic policy measures will have a material impact on the US fuel mix or global energy markets in the next four years. (In contrast, the effect of these policies on US participation in clean energy innovation, on meeting G-7 goals of global decarbonization by 2100, on the Paris agreement’s target of no more than 2 degrees warming above pre-industrial levels, and on investment in climate science would be dramatic). The economic drivers that led to the retirement of coal fired generation and the rise of renewables deployment (low cost gas and the dramatic decline in the cost of wind and solar equipment) preceded the Clean Power Plan (CPP). With the Investment Tax Credit (solar) and Production Tax Credit (wind) in place until 2020, twenty-nine states utilizing renewable portfolio standards, California and the northeast organized into emissions trading regimes, and the nine states joining a Zero Emission Vehicle Initiative, the United States may reach its Paris Agreement target on a business-as-usual basis. The ability of the Trump agenda to impact oil and gas production is highly uncertain. Easing GHG regulation and pipeline permitting are bullish for US (and Canadian) oil and gas production, but therefore bearish for global oil and gas prices. License to operate remains a challenge for shale operators and pipeline builders in the United States. Recent defeats of oil and gas pipeline projects in New Hampshire, Georgia, Pennsylvania, and, for now, North Dakota, have been based on state-level opposition. Easier federal permitting may only intensify action at the local level. Energy production will not grow beyond the capacity of infrastructure to evacuate it. Uncertainty over these policies cannot help but inhibit new investment in oil, gas, and power until the pathway is clearer or the price signal grows stronger. In contrast, the energy markets are more likely to be disrupted by the Trump administration’s management of the assortment of national security risks it will inherit over the next twelve months and the impacts of Mr. Trump’s proposed foreign policy realignments.
The risks to national security
Geopolitical crises impact energy markets when they disrupt production, disrupt transportation flows, raise insurance rates, or reduce demand. The Trump administration faces risks of conflict with China, Russia and North Korea. China is prone to testing new US presidents and Mr. Trump seems intent on testing, if not provoking, China. A Chinese attempt to create new islands or landing strips could be met with an aggressive rebuff, endangering shipping lanes. Taiwan has already become a flashpoint; China might test how far Trump is willing to go in its defense. Either scenario would result in major impacts on oil and gas transit.President Putin has made no secret of his desire to expand Russia’s sphere of influence. European security experts are focused on a potential move by Russia to exploit succession challenges in Uzbekistan and Kazakhstan, while US experts are focused on a potential Russian move on the Baltics. Russia could misread Trump’s rhetoric as a green light to move within Russia’s near abroad. The top conflict risk is North Korea. In the past twelve months, North Korea has tested nuclear weapons and missiles at an unprecedented rate, including what it claims was a hydrogen bomb, short and mid-range weapons mounting capabilities sufficient to target Japan or South Korea, and submarine-launched ballistic missiles. One risk is increased tension with China over pressure on North Korea. A second is a US show of force that could endanger shipping to Korea and Japan. Third, a failure to act could lead to unilateral South Korean action or full nuclearization of the peninsula. Oil and gas export to China, Korea, and Japan could be disrupted. The Administration may also face supply disruptions from internal unrest in Venezuela, Nigeria, or Libya. A complete breakdown of the Venezuelan economy could result in a loss of 1.5 million barrels per day (b/d), with significant spillover impacts for neighboring economies. Nigeria is likely to face increased infrastructure attacks and dim prospects for its energy sector reforms. The Libyan state remains divided with entrenched political divisions. Oil production was restored after temporary peace agreement between Eastern-based General Khalifa Haftar and Western militias; however, the situation is volatile. A Trump administration may consider realignment, siding with Russia, Egypt, and the UAE behind Haftar as a “strongman” capable of stabilizing the country and suppressing jihadists. A leadership battle could reignite civil conflict, re-shutter Libya’s export terminals and cast doubt on the legality of oil exports.
The threats to the energy sector
The Islamic State remains a global threat. There remains a risk of heightened ISIS attacks on Iraqi infrastructure, spillover into Algeria and increased pressure on Saudi Arabia. A major extremist attack in Saudi Arabia remains possible; the Saudi Ministry of the Interior recently released a report acknowledging 128 terrorist operations in the last fifteen years. This risk could grow if President Trump abandons the Carter Doctrine. In Turkey, President Recep Tayyip Erdogan has initiated a national crackdown on dissent. He appears to have abandoned peace initiatives with the militant Kurdistan Worker’s Party (PKK). The breakdown in peace efforts risks multiple supply disruptions: by the PKK on pipelines that run through Turkey, or by ISIS forces on the Kurdistan Regional government. There is growing evidence that nonstate actors have access to destructive cyber attack capabilities. In the past year, there has been a malware attack against the Saudi General Authority of Civil Aviation and the German and South Korean defense and security services. Given the magnitude of US infrastructure vulnerability to cyberattacks, cyber threats from nonstate actors will continue into the next administration. The greatest shock to energy markets could result from a shift in US leadership priorities and geopolitical rebalancing. If President Trump administration continues to question the value of the NATO alliance, US force projection in Asia, and moral leadership, such a shift could incentivize opportunistic behaviors. Major global energy producers would likely shift alliances and increase their defense spending. A shift in US policy toward Russia could lead to Russian hegemony in Central Asia and new US Congressional sanctions. In the Middle East, a retreat from the Carter Doctrine could precipitate an arms race in the region. In Asia, calls for self-sufficiency could lead Japan and South Korea to nuclearize, and a hostile Chinese reaction. In Latin America and Africa, investment from other hegemons, from Russia’s Rosneft to the China National Petroleum Corporation, will look increasingly attractive.
The potential shift in the nature of US global leadership, the management of conflict, failed state and nonstate actor risks, and the potential US and international backlash to a major shift in US policy on the environment all have the potential to roil global energy markets. While the outcomes are uncertain, this very uncertainty may have a chilling effect on energy investment across the value chain. After two years of historic cuts in capital investment, the global market needs more, not less, certainty. A failure to invest today will have damaging economic effects before the end of the decade. All we know for certain now is that we are in for a period of extreme volatility.