Will low prices pay off ?
Trump call to OPEC to resist production cuts may damage the energy sector, analysts say
President Donald Trump’s political pressure on Saudi Arabia and other foreign oil producers to keep crude prices low is harming the U.S. energy sector and the Texas economy, according to energy analysts and a new report.
Oil prices have cratered — falling by nearly one-third since early October — because of soaring output from the world’s top producers, especially the United States. Trump has called on OPEC and its allies to resist production cuts that would push prices higher, a move aimed at keeping U.S. gasoline prices low. Many analysts predict that if OPEC, Russia and other producers meeting in Vienna this week fail to agree on output cuts, it will push crude oil prices even lower.
Analysts say that Trump’s insistence on lower oil prices appears to miss the changes in the U.S. energy industry and economy. As recently as a decade ago, higher oil prices were an unabashed drag on the U.S. economy. But today, the country is the world’s biggest oil producer and rapidly expanding its exports, selling about 2 million barrels of oil a day to foreign buyers.
The volatile and falling oil prices hurt the economy, especially the Houston energy sector, even more than low fuel costs help consumers, said Sandy Fielden, director of oil and products re-
search at the investment firm Morningstar, in a new report. The recent drop in crude prices costs energy producers about $300 million a day, he said, versus about $275 million in daily savings from gasoline.
“The current administration’s policy of rejecting any OPEC move to cut production is driven by short-term pursuit of headlines,” Fielden said. “The longer-term consequences for the U.S. oil industry of pushing Saudi Arabia to reject production restraint will be felt directly in states such as Texas and North Dakota.”
The United States now produces more oil than it does gasoline, so the impact of falling oil prices on the economy is greater than it was in recent decades, he added. Energy companies retrench, many thousands of people lose their jobs and states with large energy sectors feel the pain. U.S. crude production is estimated at a record 11.7 million barrels a day, compared to gasoline production of less than 10 million barrels a day. The continued weakening of crude prices would scale back production next year.
“Reduced drilling has a direct impact on employment and economic activity in the oil industry as well as a host of ancillary activities,” Fielden said. “Since the start of the oil shale boom, these industries have been major engines of economic growth in Texas, North Dakota, Oklahoma, Colorado and Wyoming.”
Falling crude production also slows the path to energy independence often touted by the Trump administration, Fielden added.
U.S. oil prices jumped by more than $2 a barrel on Monday on optimism that Saudi Arabia and Russia are willing to cut their oil production. The U.S. oil benchmark settled at $52.95 a barrel.
Trump didn’t lower oil prices on his own, but his public statements and pressure on OPEC have contributed to the dip and exacerbated the recent concerns of oil and gas companies just after they started turning healthy profits again.
Although last year’s tax law helped energy companies and the administration has moved to cut regulations and expand oil and gas drilling, some of the president’s other policies have worked against the oil and gas sector, said Ramanan Krishnamoorti, the University of Houston’s chief energy officer. Trump has worked to prop up the coal sector in ways that have hurt oil and gas and renewable energy like wind and solar, he said, even though coal remains in decline.
Steel tariffs have have cut into the profit margins of oil and gas companies, which use vast amounts of steel for piping for oil and gas wells and other equipment. The drop in oil prices come just as energy companies are deciding how much to spend developing oil and gas projects next year, analysts said That could lead to cutbacks, which which in turn would reduce hiring.
Houston-area gasoline prices, meanwhile, have plunged about 20 percent from more than $2.60 a gallon in early October to $2.10 Sunday, according to GasBuddy, a website that tracks prices nationwide.
What’s ideal for both energy companies and consumers is stability, said Patrick DeHaan, head of petroleum analysis for GasBuddy, which tracks fuel pricing. The sweet spot for both is around $60 a barrel, a level where oil companies remain profitable and prices at the pump stay reasonable.
“Gas prices it seems are always on the mind of any president,” DeHaan said, and Trump appears to focus on the topic more than most, especially before the recent midterm elections and with Twitter at his fingertips.