Thank Trump if oil prices keep falling

Even so, the U.S. president’s stance may not have lasting effects, Joe Chidley writes.

As everyone now knows, Donald Trump has decided, after long deliberation, that the United States government will no longer (at least for the next three years and seven months) be assuming a lead role in international efforts to reduce greenhouse gases and limit anthropogenic climate change. (Anthropogenic is a big word that means, roughly, “It’s our fault.”)

So now what? Obviously, the American withdrawal has many potential implications, environmental and political. Some of them — the unravelling of America’s standing in global partnerships, the ceding of its leadership in the development of clean technologies, the fate of the planet — will play out over decades. But, in the short term, the fall of Paris may have concrete effects on at least one other area of global concern: oil prices.

Never mind that Shell, Chevron and ExxonMobil (formerly run by Trump’s Secretary of State, Rex Tillerson) all restated their support for the Paris agreement in the face of Trump’s announcement (along with the CEOs of Disney, Tesla and GE, as well as the leaders of India, Germany, Canada, China, France, and on and on). The oil markets didn’t like it, either. Last Friday, West Texas Intermediate and Brent crude futures fell, at one point by as much as three per cent, and WTI capped the week with a four-per-cent loss, ending well below the US$50 mark.

This might seem counterintuitive. Isn’t Trump’s anti-environmentalism all about making the world safe for fossil fuels? The death of the Paris agreement should get the world (or at least the U.S., the world’s largest consumer of energy) burning again — you know, in a good, hirsute, gas-guzzling way. Right?

Well, for one thing, it’s not really clear what Trump’s withdrawal means for the oil landscape.

He had already stated his wish to deregulate the U.S. energy industry and dismantle the Obama-era emissions rules for reaching (or, rather, approaching) America’s Paris commitment of reducing CO2 emissions to 2005 levels by 2025. Trump didn’t have to snub Paris to do that, by the way — its commitments are non-binding — which makes the withdrawal something of an irrelevancy.

Still, it was a big signal. And to the extent that it makes official Trump’s plan to let U.S. producers pump more oil, it’s bad news for global oil prices. We don’t know yet the impact of Trump’s policies at the wellhead, but if they lower costs, they will make those redoubtable U.S. shale producers even more resilient to price volatility. That will tend to strengthen, rather than reduce, the supply-demand imbalance in global oil markets.

But what about demand? Shouldn’t that increase under Trump’s anti-environmentalism rule?

It’s true that he is sharply skeptical of emissions standards in general — he has ordered the Environmental Protection Agency to review federal rules, adopted under Obama, that would require automakers to more than double the fuel economy of their fleets by 2025. If that review ends in a decision to scrap the new federal standards, then you might expect U.S. gasoline consumption to skyrocket. Given that gasoline accounts for about 40 per cent of overall oil use in the world’s largest economy, that’s not nothing.

The trouble is, several U.S. states have also renewed their support for Paris.

Among them, California (the world’s sixth-largest economy) has its own fuel efficiency and emissions standards for vehicles, and they are among the strictest in the world. Several other states have adopted those rules, and along with California they account for about two-fifths of the U.S. auto market. Theoretically, the EPA could adopt less stringent standards, but California could well continue with its own, as could other states. The Trump administration might try to stop them, but that would no doubt lead to a slew of court challenges that would take years to play out.

In the meantime, automakers will likely be producing more fuel-efficient vehicles, not just to appease Californians, but also to serve global demand in places like China, Canada and the European Union, which remain committed to capping emissions.

Meanwhile, Americans will be burning relatively less gas. A recent study from the U.S. Energy Information Administration predicts that, thanks to existing and future fuel-efficiency improvements, light-duty vehicle consumption will fall 10 per cent by 2025, even as Americans drive more. That’s already happening: U.S. gasoline consumption fell for the first three months of 2017, but vehicle miles-driven increased.

As fossil-fuel-friendly as Trump is, his enviro-skepticism, if it ends up doing anything more than alienating the global community, might not do very much for oil prices. Laxer industry regulation and lower fuel efficiency standards could raise supply while doing little to reverse a declining demand trend.

In the shorter term, it will be interesting to watch how OPEC — all of whose members were signatories to the deal — will react. In some ways, Trump’s withdrawal is a kick in the teeth to OPEC, which had been trying to get the U.S. onside with its commitment to limit production. The President clearly has no interest in that. And here’s the wrinkle: if Trump’s decision on Paris means U.S. production will increase, it could put pressure on OPEC producers to revise or simply ignore their agreed-upon production cuts.

The glut will continue.

In some ways, Trump’s withdrawal is a kick in the teeth to OPEC ...