Ty’s Take For the Week Ending 11-11-2016

Several people have asked me this week about what my opinions of the U.S. election results are. And at first, I hesitated to address those, but on further reflection, the election results will certainly have an impact on our business and we should address what that impact might be. Let me state at the onset of this week’s Ty’s Take, this is not intended to be a political article. I am not advocating for or against Mr. Trump, but rather I’m trying to isolate the implications of what we know about his policies and how they will affect energy.

Let’s start with the fundamental issue: we really don’t know that much about Mr. Trump’s energy policies. But we do have some inclination of where he stands.

First, the good news. We know that Mr. Trump favors an “America First” energy policy. According to his website, Mr. Trump’s vision for energy is as follows:

• Make America energy independent, create millions of new jobs, and protect clean air and clean water. We will conserve our natural habitats, reserves and resources. We will unleash an energy revolution that will bring vast new wealth to our country.
• Declare American energy dominance a strategic economic and foreign policy goal of the United States.  
• Unleash America’s $50 trillion in untapped shale, oil, and natural gas reserves, plus hundreds of years in clean coal reserves.
• Become, and stay, totally independent of any need to import energy from the OPEC cartel or any nations hostile to our interests.
• Open onshore and offshore leasing on federal lands, eliminate moratorium on coal leasing, and open shale energy deposits.
• Encourage the use of natural gas and other American energy resources that will both reduce emissions but also reduce the price of energy and increase our economic output. 
• Rescind all job-destroying Obama executive actions. Mr. Trump will reduce and eliminate all barriers to responsible energy production, creating at least a half million jobs a year, $30 billion in higher wages, and cheaper energy.

These are pretty vague and ambiguous ideas and appear to be observations and goals rather than clear policy statements or a clearly defined action plan. For example, we know that Mr. Trump has appeared to favor more energy development in the U.S., yet he is on record saying local communities should be able to vote about whether or not to ban fracking. So I posit to you: when you read the above statements, how do we really know what they mean in terms of actual, hard legislation or actions?

Nevertheless, we can gain some valuable insight as to where Mr. Trump stands from these statements. First, I believe we can safely say that Mr. Trump obviously values American energy firms and sees the value of energy related jobs. Jobs that provide high wages for a large number of workers. We also know that Mr. Trump is less concerned about global warming and climate change than the current administration, and tends to focus more on traditional energy rather than renewable energy. This ideology is clearly favorable to our industry and should, theoretically, result is a not so subtle policy shift. It could, for example, result in the end of the “war on coal”; particularly if Mr. Trump follows through on his promise to overturn the Obama Administration’s Clean Power Plan.

Finally, and positively for oil, Mr. Trump has indicated his desire to give big tax cuts and to pursue a pro-business pro-growth agenda. Such an agenda may bode well for increasing demand for oil. This will be particularly true if Mr. Trump is able to get his proposed $500 billion dollar infrastructure improvement plan enacted, which will act like a huge economic stimulus to the United States and should spur demand. The Wall Street Journal editorial board has spoken favorably of Mr. Trump’s economic proposals, as have several economists and 100+ business leaders. In addition, the stock market has reacted overall positively which is a good indication that many investors, and those that control large funds, are overall positive to his economic policies.

However, there are items in his agenda that may be negative for oil and gas. First, Mr. Trump seems to believe the U.S. is better off pursuing protectionist trade policies. His hope that doing so will spur the domestic economy into 4% GDP growth – which while high is certainly not unrealistic based on historical growth (it would be almost double current GDP growth, but well below some of the best years over the past 20 years – so not unrealistic). If Mr. Trump is correct in his assessment, that would certainly bode well for oil demand growth in the U.S. Nevertheless, it may be negative for overall worldwide oil demand.  While China’s oil demand growth has been revised down to around 1.2% annually (primarily as a result of shifting economic policies in China to a service dominated economy enacted under the new Premier), India is forecast to increase demand by almost 4% per year. Total worldwide demand growth over the similar period is only projected to increase 0.49%. Thus, a lot of what is driving the demand growth for oil is coming from nations that might find themselves subject to trade penalties. This makes sense as these developing nations use more energy for production, and as their citizenry gets better off economically, for personal consumption. This is potentially negative for oil as it will slow worldwide demand growth.

In contrast to those who view Mr. Trump’s policies as economically positive, many other economists and think tanks believe that full implementation of Mr. Trump’s stated policies would have a negative effect on the U.S. economy. As published in the Wall Street Journal, Moody Analytics, for example, says that full implementation of Mr. Trump’s plans would sharply reduce U.S. economic output and cost the U.S. economy 3.5 million jobs. They are not the only group to take this position.

Finally, Mr. Trump has indicated his desire to throw away the nuclear deal reached with Iran. This has two major implications for oil and gas service companies. First, any investment by foreign oil companies in Iran will necessarily be long-term. Until big oil is assured that they will likely be able to reap the fruit of their investment, they are unlikely to develop Iranian fields. Therefore, I do not believe we will see U.S. oil companies rushing to close deals in Iran until we have more knowledge of what Mr. Trump might do with respect to the Nation. Second, some have argued that Mr. Trump’s stance on Iran complicates any OPEC production freeze deal. But on reading the various articles arguing that position, this seems to me to be more of a concern over reduced global demand and increasing U.S. production rather than any tangible reason which creates true structural barriers to a deal. Yet, many sources that I respect have taken this position, so I thought I would mention it.

Having now given you the foundation I will say that it is not time to react either way. Remember that like all other Presidents before him, Mr. Trump will have to negotiate and compromise. The United States is not a constitutional monarchy, it is a republic. Even if he wished to large scale repeal regulations, he has to get Congress on board. Moreover, many regulations concerning energy are enacted and enforced at the state level – so the President has little impact on them. Even though Republicans theoretically control Congress, Democrats retained 48 Senate seats. That means that there will have to be compromises. Mr. Trump has a large basket of policies, and like any other President, he will have to choose his priorities. Similarly, if Mr. Trump wants to “tear up” the Iran Nuclear deal, it is unlikely all of the other countries that negotiated along with the U.S. will do the same. I personally doubt Russia, China, the U.K., France and Germany are going to terminate the agreement, even if the U.S. does. While Mr. Trump can certainly take a wide range of executive actions (from repealing any executive orders issued by Mr. Obama, to ripping up NAFTA), he is still limited, as any President is, in what he can do. So, until we have a better idea of his true policy agenda and priorities in concrete terms, I do not think we can realistically assess their economic impact.

Either way, right now we simply do not have sufficient information to know what policies Mr. Trump will enact and we will not have a very good idea until he is at least a couple of months into his Presidency. I’ve already seen articles predicting $20.00 a barrel oil under Mr. Trump and doomsday scenarios. Unlikely. But I can say, at the very least, we have a President-Elect who has given every indication that he will be more favorable to the U.S. Energy Industry than the current Administration, less concerned about climate change, and more concerned about creating a pro-growth economy in which he recognizes the value of high-paying energy related jobs. These are all very encouraging signs for our industry over the long-term as they will likely lead to lower impediments to production (regulation, scarcity, etc.) thereby driving down the cost or production and making production more likely even if oil remains lower for longer. So while there are certainly concerns that I brought to your attention above, there are also many net positives for our industry.