Trump Announces Fake Deal to Raise Oil Prices

SK Ashby
Written by SK Ashby

Trump's boast on Twitter that the Saudi and Russian regimes agreed to dramatically cut oil output was enough to send oil prices soaring yesterday but, as we all should have immediately expected, Trump did not actually secure a deal with either regime.

There is no deal because the United States is actually the world's largest producer of oil now and American firms have not agreed to cut output and it's possible they never will.

From Bloomberg:

In Saudi Arabia, there is one oil company, the state-run behemoth Saudi Aramco. This makes for a fairly simple process to set policy goals when the country negotiates output quotas with rivals.

In the U.S., there are more than 6,000 oil drillers -- everything from tiny wildcatters in the shale patches of Texas and North Dakota to global giants like Exxon Mobil Corp. [...]

Oil soared as much as 35% after the presidential tweet, then pared gains after Saudi Arabia and Russia didn’t confirm they had agreed to any cuts. The Saudis called for an urgent meeting of the OPEC+ alliance -- which includes Russia -- to reach a “fair deal” that would restore balance in the markets, state-run Saudi Press Agency reported.

To satisfy Saudi Arabia’s insistence that all share the burden, Trump would have to unify a fractious and discordant group of U.S. companies and states that haven’t faced output restrictions in nearly half a century. That includes some 6,000 shale drillers that, until very recently, were responsible for soaring U.S. production.

I filled up my gas tank this morning and the price of gas was actually about 20 cents per gallon higher than it was just two days ago, but that's not because the supply or demand for it has changed. I was literally the only person at the gas station this morning. Price swings at this point in time are purely speculative and Trump did his part to kick off a round of speculation.

Trump is meeting with oil industry CEOs at the White House today and we should probably expect to see Trump make some kind of announcement even if conditions have not actually changed; even if there is no deal.

Low oil prices are not a bad thing for anyone but the oil industry, but even within oil industry it's a mixed bag. The largest producers can handle the shock of lower returns and they're the least likely to support output restrictions. Smaller firms, on the other hand, are at risk of going bankrupt and the large firms would be just fine with that.

There's shades of Trump's trade war and his tariffs on foreign metal here. In the latter case, firms within the American metal industry have fought each other to gain the upper hand with some supporting tariffs on their vulnerable rivals.

It should be clear now that the federal government shouldn't interfere in commodity markets the way Trump has throughout his time in office. The only rhyme or reason to any of Trump's interventions has been political. There is no economic case here, at least not one that wouldn't come at the expense of others. Trump's tariffs have cost the wider industry far more than it has helped specific industries and his scheme to raise oil prices could be no different.