What can Trump do about the price of oil?

0:05Pushkin. Donald Trump wants to make America great again by cutting energy prices in half. He has said this repeatedly on the campaign trail. Oil is the most important commodity in the world. If Trump gets his wish, it will matter for markets and economies the world over. Today on the show, how low can oil go? This is Unhedged, the markets and finance podcast from the Financial Times, streaming to you from beautiful Unhedged headquarters in New York City. I am Rob Armstrong, impresario of the Unhedged newsletter and sometimes host of this show. I am joined by my trusty lieutenant, Aidan Reiter, who has just written a newsletter on this very topic.

0:58What do lieutenants say? Ahoy, captain? Clearly you don't have a military background. I do not. Yeah. Anyway, you salute smartly when I walk into the room or something. Aidan, oils at$72,$73. dollars, that's kind of middling compared to where it's been over the recent years. It's like the middle of its decade range, something like this. What has to happen for that number to fall by half? And then after we discuss that, we can discuss what will happen if that happens. There's a lot that has to happen, right? The oil market is famously global. It famously relies on geopolitics just as much as it relies on market movement.

1:39And really, supplying demand is a big part of the picture. Yeah, of course. It's everything. Yeah, a lot of things have to happen for oil to go by half, which is probably hyperbolic, but what Trump says. Yeah. Also, we should probably note that Trump is not the only person who wants cheap oil. Every American president has often wanted cheap oil. Even President Biden wanted cheap oil. There was a lot of action and rhetoric about green energy. But the fact is that under his administration, domestic production of petroleum rose a lot. and hit new highs, in fact. Yeah, not only did he loosen up the reserves, the Treasury Department worked really hard to make sure that Russian oil, which no longer was going to go to the U.S.

2:20and Europe, still had a place to go to, so the entire oil market wouldn't implode. Yes, interesting. So everybody wants it. It's good retail politics. Yes. And it arguably played a big role, and maybe even a bigger role, in how people see inflation. Yes. So Johanna Su, who is the person who publishes the Michigan Consumer Index, had a great paper where she's like, A lot of the reason people think inflation was worse than it was or is still bad, consumer sentiment still low when inflation came down was because they were really annoyed about gasoline prices. Yeah. I mean, a wise friend of mine once said, when you ask Joe or Jane Sixpack on the street, you say, how's the economy?

2:56You're really asking them two questions. This is what they hear when you ask that question. They hear, do you have a job and what is the gas price? I think for many people, that is the economy in a certain way where everybody cares about their job. And America is a driving country. So the gas price is crucial to people's psychology. And their psychology about inflation is especially driven by that. Yeah. And Joanne Shue's paper shows that it's even more so now. People care about it a lot more than they did in previous cycles. It has become more salient. That's very interesting. Does she speculate about why that is?

3:31Why people care more? It's a great paper. I would encourage people to read it. And part of it might be due to social media and how people engage with the news. Part of it might just be this unique moment of post-COVID and the weird things going on in the cycle. But yeah, so it's always been salient and it might be even more salient for Trump. Even more salient now. Okay. Now, I want to hold on this thought a little bit because inflation is so important here. Now, we are nerds. We are proud nerds here at UpHedged. And one thing we nerds know is that when inflation is measured officially, it is measured as core inflation, excluding food and energy.

4:10So you might say, actually, it doesn't matter to inflation or headline inflation or inflation as we measure it, what oil does. Right? Yeah. But, you know, oil has, you know, oil is in everything. Energy affects everybody, everything. It will affect the price of all other goods because everybody has to use oil to make whatever they make. Or there's a complicated relationship between oil, fertilizer, and agriculture. So it goes into food. And yes, food is also stripped out. But at the end of the day, the Fed and other central banks are operating both in the actual core, but they also want to have the public approval to take the action needed.

4:45And if people are really, really mad about oil prices, about gas prices, they lose some of their cover. It doesn't matter what adjusted core personal consumption expenditure inflation means if the whole country is pissed off. Absolutely. And as we saw in this election cycle in the U.S. and around the world, politics is completely linked to how people feel about the economy. Right. Every incumbent party lost seats. And inflation in particular. Inflation and gas in particular. Absolute electoral poison. Okay. So we know people care about it. We know it is important. Actually, let me pause here again.

5:25If gas prices, oil prices, electricity prices, energy prices fall by half, does U.S. GDP go up or down, all else being equal? It's complicated. Damn you with your complexity. Things have changed in the past couple of years now that the U.S. is a net exporter. Yes. When did that happen? When did the U.S. become a net energy exporter? It's like in the last couple of years only. I think 2023 was the actual year, but it's sometime in the last two years. Yes. But now we're exporting more than we are importing. That's great for the U.S. and for regional security, et cetera. But in terms of GDP, it's kind of complicated, right?

6:06Because if you have lower oil prices, A, that then impacts the earnings of so many of those oil companies. It could also impact the investment that they put into the U.S. economy to get more oil out and also it impacts the trade deficit. But you see theoretically in the past, there's been an empirical link between, oh, cheaper oil prices becomes much cheaper to build more, manufacture more. So it helps your economy. So in the US now, it's not so clear. I think on average, you could say it's a good thing, but part of that might just be the perceptions that we just spoke about. And it is from the point of view of the voter, again, to return to the retail politics side, it's like a tax cut.

6:44Yeah. Right? Right. We were talking the other day, the average American drives 15 ,000 miles a year. You can do a little math there and it's miles per gallon in your car times the gas price times how much the gas price falls. And you have a dollar value that's a$500 tax cut or something. Same thing goes for heating their houses. And this is an area where inequality is especially palpable, right? Yes. If you are on the lower end of the income spectrum, more of your budget is going to those essentials. Yes. You can't just not heat your house or not drive your car to get to work. whereas so it really is especially salient and really important to make sure that lower income households have access to this at a cheap price.

7:21But interestingly, it is not a clear plus. Like when I was coming up as an analyst and as a financial journalist, it used to be that the oil price was just a plug into your GDP model and a lower price meant higher GDP. But as of a couple years ago, not true anymore. It's interesting how things change. Okay. So now we've established Lower oil prices, energy prices, gas prices, electricity prices are good for retail politics. They are good for the perception of reality of inflation. And they are probably on net good for the economy, but it's somewhat hard to say. What has to happen for Trump to get$36 oil or whatever his goal is?

8:03One quick pause there in that he said he wants energy costs to be lower. Yeah. U.S., you know, oil goes heavily into manufacturing, car gasoline, but natural gas is a big part of the utility grid, the energy grid. Fair enough. It's complicated. We should just briefly say natural gas is a weird thing that comes out of the result of, you know, getting oil out. We actually have a huge surplus in the U.S. The thing is we just have a bad grid and bad pipelines to extract that. Right. So that is actually an area where investment could matter, right? If we get a better infrastructure, natural gas infrastructure, that could drive that price down.

8:37Yeah, but according to Goldman Sachs, and right now the US is either importing from Canada or Mexico, it's not really going across the Atlantic. Yes. According to Goldman Sachs, a lot of the natural gas companies are starting to build terminals and ports in Europe so they can start exporting and taking advantage of the higher prices in Europe. Yeah. That would bring US supply down and could bring prices up in the US. Yeah, it's interesting. There's a lot of puts and takes. You hear numbers about what one of these natural gas terminals costs and how long it takes to build, and it's like a thousand years and a kajillion dollars.

9:06You know, so this is a kind of long cycle investment issue. Okay. So having made our aside about natural gas, what can Trump do to actually help the price of energy fall? So as we said before, oil is such an incredibly international market and relies on supply and demand and geopolitics. So there's a lot that's out of his control. But I would say that there are two things that are probably in his control. The first is how he responds to the war in the Middle East. Of course, the war in the Middle East is a complicated thing. He's not going to have all the levers at his disposal. Interestingly, and this is noted to us by multiple analysts, the oil market has kind of learned to shrug off the Israel-Hamas war and its impact on oil.

9:52You know, the oil price would jump when there was brinkmanship between Israel and Iran. But for the most part, it's been like a low simmer, even though the conflict has been pretty hot. So it hasn't had a huge impact. But the Iran question could make things worse. So if Trump's foreign policy is, if he tries to get a ceasefire and he does so and he negatively impacts Iran and then you get brinkmanship, that could bring up oil prices. But that's not totally in his control. What is in his control is how he sanctions Iran. Iran has an output of about a million barrels a day. In the last administration, he sanctioned that oil and tried to crack down on that oil.

10:26If he does so again, you could see a million barrels of oil, which is about 1 % of the market, come out per day. This is just a fascinating area where markets, domestic policy, and foreign policy all point in slightly different directions. So domestic policy, cheap energy, foreign policy, we want to be strong on Iran, right? That's been his position. But if you are strong on Iran, if you sanction Iran, the oil price goes up, the oil market tightens, and you've defeated part of your domestic agenda. Absolutely. So this is a puzzle for statesmen to solve. Absolutely. And, you know, Israel, Palestine, Lebanon, it's very complicated to begin with.

11:13Yes. So even the micro things he does there could enrage Iran either way. Okay. So let's turn to Russia. Russia's not that big of an impact on the oil market, right? When the war kicked off, of course, it surged energy prices. A lot of that from analysts we spoke to was more about distribution and trade. Russian oil has kind of found a home in India and China. So the impacts on the oil market are probably negligible. If anything, it'll bring prices down a little bit because it'll make some trade things easier and lower the cost of transport. It could impact the natural gas market is my understanding.

11:44Yes. Right. So if whatever ceasefire Trump is trying to get, because clearly he's trying to get one, It's a high priority. It's a high priority. If it's perceived as good for the EU, EU countries might be like, okay, maybe we'll stop weaning off Russian natural gas, which they've been trying to do. And then that affects the natural gas price. That goes down in Europe and maybe disincentivizes US producers from exporting so much to Europe. Yes. So that brings natural gas down in the US. Politics washers tell us low oil prices are an incredibly high priority for this White White House. And it's interesting how if that's true, they have a very strong incentive to get these war questions off the agenda altogether.

12:25Yeah. And again, potentially not go as hard on Iran as you might otherwise. Maybe go easier on Russia. Yeah. Again, the flow through to oil is not so clear, but helping EU get what they want out of a Russia-Ukraine deal would help natural gas theoretically. That's not a guarantee. Okay. The other one that he kind of can control is Venezuela. The first term was very hawkish on Venezuela. Really, really took a lot of financial sanctions on the Venezuelan state-owned oil company. Biden has kept most of those in place, momentarily reversed them. It's about a million barrels a day. Again, 1 % of the global market.

12:59If he goes harder on Venezuela, that could make things worse. But again, he is concerned about immigration or really wants to stop immigration. If you tighten the screws on Venezuela's economy, that makes immigration out of Venezuela and to the U.S. by extension, potentially worse. So he might not want to squeeze them as hard. It's hard to be president. So where does Trump have to get lucky? What are the things about energy that Trump does not have a lever to pull? OPEC plus is probably the biggest shadow on the market right now. There's been voluntary production cuts from Saudi Arabia and its allies in the bloc.

13:34they have had trouble getting people to abide by those cuts. And now Saudi Arabia, which kind of leads the block in the UAE, are kind of getting the worst of both worlds. It's cheaper oil because places like Iraq and Kazakhstan are producing more. And they're losing market share steadily, especially as the US and other economies make more oil. Those production cuts have been extended to 2025. A lot of analysts believe they're going to phase them out over the course of the next year plus. There's still definitely like a floor they're protecting, but those voluntary extra cuts could go away. Yes.

14:04That's potentially up to 6 million barrels a day. That's bigger than all the stuff we've talked about so far. Bigger than all the stuff. 5%. Yeah. So if they start ramping up because they want to protect their market share, that really brings oil down. Okay. OPEC Plus, what's next? And then there's just global growth. Yes. So, you know, we have somewhat of waning global growth in the last two years. That depresses oil demand. Yes. Oil demand is still at all-time high, but it's slowing its growth. The trajectory is going down and it's expected to go down. I mean, the cliche you always hear when you mention the oil market to anyone on Wall Street is the marginal barrel of oil gets bought in China.

14:40And the first thing oil analysts talk about is, how is China going to do? And the news out of China lately, not so great. Not so great. A lot of people think that China's oil demand is going to peak next year and then start plummeting, partially because of growth, partially because they have great electric adoption, electric cars, et cetera. Okay. So that's something you can't control. Now, tariffs could play a role in that. If global growth slows down a lot because of tariffs, then you could really get a huge deep in oil. There's no question in my mind that a trade war, a proper good old fashioned 1930s style trade war would give us much lower oil prices.

15:18Yeah, lower oil prices or theoretically everybody has to replicate things they are doing in other economies. So they have to buy more oil. So that drives up price. It's kind of complicated. Also, if things slow down so much, then theoretically oil prices would help a bunch of economies heat up again. It's just like this seesaw, but I think on average, it would be bad. Bad for global growth. Correct. Correct. Of course, an important aspect of all this, and one that the Trump administration to be emphasizes, is greater production from the United States. So Scott Bessent's famous 333, reduce the budget deficit to 3%, 3 % economic growth, and 3 billion more barrels a day of domestic oil production.

16:02How does that 3 million barrels play into this picture? Yeah, I mean, 3 million barrels is about - It's a lot, right? That's 2%. 3 %-ish, 2%. It's also a 25 % increase on current US production. And that's a big increase. Chunky. Chunky. And, you know, part of that is he's going to deregulate some things, allow more drilling. You might get some just from the more drilling. But it's unclear what the deregulation would do. Yes. And at the end of the day, the thing that controls whether U.S. producers make more oil is the price of oil. Yes. And at$36 oil? Not going to get it. Not going to get it. The U.S.

16:36break-even average across the U.S. average is about$65 per barrel. Yes. So if it goes below$65, you're not going to get a lot of investment from these companies. I mean, of course, there's a huge amount of variation in there are plenty of U.S. oil producers who can make money even in the 30s probably, but there's a lot who can't. Yeah, and theoretically the deregulation and, you know, he picked a shale guy to be the secretary of energy. So they could try to bring down that break even cost. Yes. But at the end of the day, 65 is still the average. Yes. And, you know, at sub 40 oil rigs are going down.

17:11Yeah. So he might get his goal, but if he gets that goal, it's going to undercut his other goal. Yes. Again, the presidency, a painful exercise in hard choices for every president. So it's prediction time, Aidan. In the case where everything goes in the direction of cheaper oil, that is global slowdown, no sanctions on Iran, no sanctions on Venezuela, peace deals, ceasefires, whatever, get signed both in the Middle East and the Ukraine. Everything we've discussed goes the cheap oil direction. What is the low oil price we're going to see in the next four years? The absolute low. Theoretically, that brings on 7 % more of oil production.

17:56That's a lot. So global demand is down. Yeah. For context, in the depths of the COVID crisis, oil hit about 32. There was kind of a micro energy glut crisis mess in 2016. We got down into the 30s then as well. I mean, I don't think it's going to go as low as the 30s because it won't necessarily be a crisis. Yes. But I could see it going 40s, 50s. Yeah. What about you? I'm taking the under on that one. I think, you know, if all the issues we went through flip in the cheap oil direction, oil with a three handle makes sense to me. And on that point of prognostication, we will be right back with Long and Short.

18:50Listeners, welcome back. This is Long and Short, that part of the show where we go long things we like. and short things we don't like. Aidan, are you long or short something? Yes, I am long parliamentary democracy. Wow. It's been quite a week for parliamentary democracy. Yes, it has. So, you know, martial law was called in Korea. And then interestingly, the parliament just voted it down and then it kind of just died. Yeah. Same thing, you know, Barnier in France was voted out by parliament. You cannot like some of these developments. You can like some of these developments, but parliamentary democracy is at it.

19:21And markets like parliamentary democracy. Indeed they do. Both European and Korean markets took this turbulence in stride because parliamentary democracy won. I have a somewhat more trivial but still very strong short. I am short brunch. This is a longstanding grudge of mine. It's like a 2012 grudge. Oh, God, I hate brunch. It's the wrong time of day. It costs way too much money. all the places you would have it in New York City, you have to wait in line. It is the worst. And here's my proposed solution to this problem. We should just pass a law that means you have to call brunch overpriced breakfast.

20:06And it's just illegal to say the word brunch. All you can say is let's go out for overpriced breakfast. I mean, the way I approach it is great. I'll wake up late and then just have a really big meal for my breakfast and my lunch. And at the end of the day, the cost savings there and the economies of scale are kind of cheaper than two meals. I guess. It sounds like Aiden secretly likes brunch. Openly. You're fired. On that note, listeners, we'll be back in your feed on Tuesday.

20:38Unhedged is produced by Jake Harper and edited by Bryant Erstat. Our executive producer is Jacob Goldstein. We had additional help from Topher Forges. Cheryl Brumley is the FT's global head of audio. Special thanks to Laura Clark, Alistair Mackey, Greta Cohn, and Natalie Sadler. FT Premium subscribers can get the Unhedged newsletter for free. A 30-day free trial is available to everyone else. Just go to ft.com slash unhedged offer. I'm Rob Armstrong. Thanks for listening.

21:21We'll be right back.