Trump’s tariffs put a clamp on shale
Experts are in a raging debate over the future of North American oil production, but only the self-proclaimed Tariff Man has control over the fate of the shale drilling revolution.
President Donald Trump’s belligerent approach to international trade is stifling the global economy and slowing demand for oil. Turning allies into enemies has squelched business investment, leaving the world awash with surplus energy.
If the Tariff Man does not change his strategy, a global recession could spell the end of the oil and gas renaissance in Texas, leading to global supply problems and price hikes in the long run.
Last week, my colleague Jordan Blum chronicled the dramatic slowdown in shale investment and drilling, asking analysts whether Texas oil and gas production has peaked. It is a reasonable question, but with an answer as unknowable as the future of the global economy.
Shale drillers are scaling back because oil prices are dropping due to an oversupply. The surplus was created by lower-thanexpected demand due to slower economic activity.
Guess what’s causing that? World economic growth was 3.8 percent in 2017, the year Trump took power, and a year before he started imposing tariffs on our most important trading partners. Last week, the International Monetary Fund revised its 2019 forecast for the global economy down to 3 percent, the lowest level since the Great Recession.
“Two years ago, the global economy was in a synchronized upswing. Measured by GDP, nearly 75 percent of the world was accelerating,” Kristalina Georgieva, the new director of the IMF, said in her inaugural speech. “Today, even more of the world economy is moving in synch but, unfortunately, this time growth is decelerating. In 2019, we expect slower growth in nearly 90 percent of the world.”
Global trade growth has come to a near standstill, Georgieva added. “Even if growth picks up
in 2020, the current rifts could lead to changes that last a generation — broken supply chains, siloed trade sectors, a ‘digital Berlin Wall’ that forces countries to choose between technology systems.”
Tariffs hurt the economy in two ways. First, they tax consumers. Exporters do not pay the tax; U.S. Customs collects tariffs from importers when the product enters the country. Companies must cut their profit margin or raise prices. Either way, tariffs hurt the domestic economy.
Creating uncertainty
Second, tariffs and the threat of tariffs create uncertainty among investors. Executives cannot develop new business plans if they do not know how long a tariff will last or when a new one could pop up. Without confidence in the future, business people do not invest or hire; they wait and see.
The World Uncertainty Index, which is based on
The Economist Intelligence Unit’s quarterly reports from 143 countries, has jumped from a neutral score of 100 in 2017 to 285 in July, the highest level recorded since the index started in 1996. Trump prides himself on keeping people off-balance. He is succeeding.
Demand for oil fell year-over-year in May, June and July, the first time that’s happened over three consecutive months since 2009, according to analysts at Standard Chartered, an investment bank. Even attacks on a Saudi crude facility and an Iranian oil tanker have failed to raise concerns about oil supplies. West Texas prices rose above $60 a barrel for only a day, and future contracts reflect an oversupplied market for years to come.
Low prices discourage investors, which is why analysts wonder if the Permian Basin has seen its best days.
“The oil ‘shale revolution’ is over. Finally,” declared New York investment research firm Evercore ISI, according to Blum’s reporting. But reports of the revolution’s death could be premature.
Trump got us into this mess, and he could get us out. He can recognize that taxing the American people to hurt nation-state competitors does not make any sense. Sowing discontent among business leaders does not spur the economy.
Trade deals vs. tariffs
We undoubtedly need better trade deals, but there are stronger tools than tariffs. Fairer, mutually beneficial trade agreements based on capitalistic and democratic principles that attract dozens of nations, can be used to lock out bad actors such as China.
By creating exclusive clubs with our closest allies, Trump can create trade envy. Recalcitrant nations would feel pressure to play by our rules and keep the U.S. at the center of the global economy.
Increased trade would increase demand for energy. Texas could make full use of its new liquefied natural gas facilities to export a cleaner fuel worldwide to replace coal. The shale revolution could last another decade if only the Tariff Man sought a new moniker.