Donald Trump is now President of the United States. After eight years of the Obama administration pursuing an energy policy concerned with “clean energy” and a reduction in carbon emissions, what can the US expect from their new president, and how will this affect the global energy market?
The US Dollar
Following Trump’s shock election win in November 2016, the dollar started 2017 at a 14-year high, the exact opposite of the stock market crash that was initially predicted.
However, uncertainty surrounding Trump’s presidency has caused the dollar’s value to fluctuate quite significantly over the last week or so. His comments on the dollar being too strong weakened the dollar’s value momentarily but this was quickly recovered when the Federal Reserve chairwoman, Janet Yellen, said she expected few rate hikes until the end of 2019.
So, what does this mean for energy prices? Well, the value of the dollar is inversely proportionate to crude oil prices. A stronger dollar results in higher oil prices for importers, of which the UK is one. Oil is priced in dollars and, combined with a weaker pound and production limitations announced by the Organisation for the Petroleum Exporting Countries (OPEC), prices are set to rise.
The Oil Industry & Oil Prices
Back in November 2016 it was assumed that Harold Hamm, Chief Executive of oil producer Continental Resources, would become Energy Secretary under the Trump administration, strengthening the US’ position in the crude market. However, in December it was confirmed that former Texas governor, Rick Perry, would be taking on the job. Ironic, since Perry had notoriously expressed a desire to abolish the Energy Department back in 2011, famously forgetting he did any such thing when he ran for president in 2012. He’d also been a rival of Trump during the Republican presidential nomination campaign, retracting his criticism of Trump once it became clear that he was likely to win.
Perry, like Hamm, championed the oil industry as Texan Governor, questioning climate change and the impact greenhouse gases have.
Trump is, therefore, likely to open more federal-owned land to energy production, increasing domestic energy supplies, driving down prices in a bid to boost the US economy – this is a reversal of Obama’s administration which rendered certain federal-owned land as ‘off-limits’ to gas and oil mining.
In his first week alone, Trump has already given permission for 29 additional rigs to open for business, bringing US production in line with the levels seen in 2014, a level which contributed significantly to the global crash in prices.
Production in the US is therefore already higher than expected, pushing price-per-barrel down in terms of demand vs. supply, The economic stimulus this will provide to the American economy however, may see the dollar getting even stronger meaning we may still see little of this price decrease in the UK.
Trump’s Foreign Energy Policy
Trump has been vocal about his plans for an “energy renaissance”, believing that by producing more American energy, jobs will become available and it will improve the US economy as a result.
He claims that “America is sitting on a treasure trove of untapped energy” – about $50 Trillion worth – and that for every energy dollar ignored domestically, the income is being recouped by producers abroad, in countries which lack the “high environmental and conservation standards” of the US.
Trump envisions an energy-independent future for the US, aiding balance of trade and reducing reliance on foreign imports from the likes of Russia and Saudi Arabia. For the US foreign policy, this may allow Trump to take a harder line in negotiations, but with rumours over Trumps favourable relations with Putin being a cause of much media speculation, it’s difficult to say how much impact energy production will have on relations with Russia.
Trump’s Domestic Energy Policy
From a domestic point of view, Trump is convinced that by opening up US federal land and supporting shale gas and oil projects, it will result in millions of new jobs being created for US citizens – increasing tax revenue and pumping more money into the economy.
Trump is also set to reverse the Obama administration’s decision to block natural gas export terminals, opening up America for trade, in an attempt to break the power Russia currently holds in Europe as a result of gas supply.
“Lifting restrictions on American energy, including shale gas production, will accomplish the following:
increase GDP by $100 billion annually, add over 500,000 new jobs annually, increase annual wages by more than $30 billion over the next 7 years, increase federal, state and local tax revenues by almost $6 trillion over 4 decades, increase total economic activity by more than $20 trillion over the next 40 years.”
Obama’s anti-coal regulations and focus on clean energy alternatives to create jobs, while also cutting emissions, may have earned trust from environmentalists, but it led to concerns from labour unions representing workers in the mining heartlands, while also raising fears that the US will become increasingly reliant on foreign sources of energy, imported from countries that are seen as ‘hostile’ to the national interest.
The priority Trump seems to plan on giving to the oil and gas markets may stimulate the economy, but it will be interesting to see whether a resulting oversupply negatively impacts prices in the long run, limiting profitability, in theory, and deterring OPEC from bowing to supply reductions targets.
Trump famously called global warming a ‘hoax’ at the start of his presidential campaign, so what will happen to the US’s climate change commitments?
The Environmental Protection Agency’s (EPA) Clean Power Plan, whose implementation was overseen by Obama, is likely to be retracted due to its expense and top-down nature, imposing restrictions on states for whom shale, oil and coal are the life-blood of their economies – Pennsylvania, Ohio, Michigan and Wisconsin. Anti-coal policies under the Obama administration were many and it’s expected that Trump will rescind many of these regulatory restrictions.
Trump is also expected to help streamline the opening of the Yucca Mountain, for nuclear waste storage, and pay more attention to proposals for innovative new nuclear reactor designs. While environmentalists are not overly thrilled by this prospect, increased investment in nuclear may actually increase the amount of emissions-free power available, helping the US to continue meeting its carbon reduction targets.
While regulations surrounding coal and nuclear are set to be reduced, Trump isn’t planning on being overly forgiving to the renewables market. Wind energy producers will receive harsher penalties for the killing of rare bird species (a reversal of allowances made under the Obama Administration). Subsidies such as the Investment Tax Credit and Production Tax Credit, for Solar and Wind power are also likely to be reduced, exposing them to the free market.
Furthermore, it should be noted that the US’s wind and solar industries employ over 300,000 people, five times more than the coal industry, making it a key constituency for Trump to keep on-side if he is to fulfil his “more jobs” promises.This should go some way to ensuring a layer of security for renewables over the next four-years at least. Interestingly, renewable stocks took a hit immediately after Trumps election, but have since recovered indicating that there is still confidence in green energy projects.
However, Trump’s presidency may not be totally catastrophic for alternative energy sources. Hydro-power has the opportunity to increase its production by 50% with minimal environmental impact.
During Obama’s final few years, he was accused of delaying hydro-power improvements as a result of governmental red-tape and environmental opposition. However, it is argued that innovative new technology from engineers and scientists at Alden Laboratories reduces drastically the eco-system impact, categorising environmentalist views of fish extinction as outdated.
How will all of this affect the UK?
A thriving US oil and gas sector may be great news for US citizens in terms of energy prices, but what about us here in Britain?
As mentioned above, a strong US dollar usually results in higher energy import costs for the UK however, this may be balanced out by a reduction in price-per-barrel caused by increased production.
Furthermore, Trump recently came out and condoned the UK’s decision to leave the EU. He announced an intention to set up a favourable trade agreement with the UK as soon as he entered office and was quoted as saying “we’re gonna get something done very quickly.” This may result in a deal which could include energy.
For now, however, it seems that the future of oil prices and therefore energy bills will remain uncertain. The best action you can take as a business owner is to lock in energy prices now and rest safe in the knowledge that those prices will be honoured for the duration of your tariff’s term.
To ensure you’re not overpaying for your business energy and to discuss your options please do not hesitate to call our friendly energy experts on 0800 988375.
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