After the shock post November 8th with the result of the US presidential election, the world started studying what a Trump presidency in the USA would mean to the international markets and geopolitical environment. The vast majority of the polls and political analysts were wrong in their predictions on the outcome of this election. Hillary Clinton was the favourite, praised by the media and anticipated to defend Obama’s legacy in most policy aspects. The international markets would continue operating business as usual, and Brexit would have been the only bump in the road in 2016.
The surprise outcome of the election caught everyone off guard. Donald Trump, an entrepreneur and entertainment star, with dubious business records and no experience in office—the unlikeliest choice by any keen observer of American politics—will become the 45th president of the most powerful nation in the globe. He will take Obama’s place on the 20th January 2017 and, by then, world leaders will have to have a strategy in place on how to make international deals with a nation headed by a chief executive with an unpredictable, volatile personality.
A Bullish Case for the Oil Markets
Oil prices are regulated by a global balance between supply and demand. The drop in the price of the oil barrel from pre-2014’s levels had oversupply as its main cause, fuelled by a large number of oil exploration projects undertaken on the idea that high oil prices would be indefinitely sustainable. New technologies allowed increasing rates of oil recovery, and fields that previously were deemed uneconomic, could finally become profitable.
The Shale Revolution in the USA occupied a centre role at this stage. A combination of horizontal drilling, hydraulic fracturing and high oil prices created the right conditions for a boom in oil production one decade ago. Since then, the market got swamped with new players. The oil industry became more attractive than ever and the USA experienced a steady growth in oil production and an increasing independency from oil imports.
At the same time, China started shifting towards an economy more focused on services rather than major infrastructure projects. News regarding Chinese shopping malls being completely vacant and, later, whole ghost towns with brand new buildings and no inhabitants, started popping up in the international media. That was a statement of the Chinese overshooting in infrastructural projects and that investing in the sector was no longer so attractive.
By January 2016, oil reached its lowest prices since 2003. Then came the final blow: Iran’s sanctions were lifted and the country could sell oil in the international market. Within 4 months Iran flooded the markets with an additional half a million barrels per day and drowned any hope that the price of the dark gold would recover any time soon.
The Trump Effect
During his campaign, Donald Trump had repeatedly criticized the Iranian Nuclear Deal. In simple terms, the agreement stipulates that Iran would stop pursuing a nuclear program with military objectives in exchange of having freed up tens of billions of dollars in oil revenue and frozen assets. The “disastrous deal”, in Trump’s words, “rewards the world’s leading state sponsor of terror with US$ 150 billion and we received absolutely nothing in return”. Trump said that correcting it would be his “number one priority”. That said, he had put several matters as number one during his campaign and since then, he has changed his mind on subjects considered “core” to his voters: his immigration policy of deporting 11 million illegal immigrants, which has now been reduced to a maximum of 3 million and only the ones with criminal records; and his shutdown on any Muslim immigration, which later in the campaign was moderated to the vague strategy of “extreme vetting”, to name but two examples.
Donald Trump may or may not try to dismantle the Iran Nuclear Deal. He certainly will have strong support at home as most Republicans were against the accord and now they occupy not only the White House, but also have the majority in the Senate and in the House of Representatives. Furthermore, the deal was not a USA–Iran bilateral agreement. It involved the UK, Russia, France and China as well. Hence, an American withdrawal will not necessarily ruin the whole arrangement; however, it could make demands such as insisting on tougher inspections in Iran and making them more frequent, which could, eventually, force Iran to pull out of the deal.
The Iran Nuclear Deal was orchestrated by moderate Iranian President Rouhani. He won the last elections with a bit more than 50% of votes, with the remaining votes split among a handful of other parties. New presidential elections in Iran will take place in May 2017 and may pose some challenge to Rouhani’s legacy. If the conservative factions are able to unite around a popular candidate, who could exploit widespread economic discontent in the country, there is some chance Rouhani will not be elected for a second term. Looking at the growing populist and nationalist movements taking ground around the world, it is not difficult to envisage that this trend could reach Iran. A more conservative president may see complying with the Iran deal as an affront to national interests and could just call it off.
In this scenario of a broken nuclear deal and the resurgence of international sanctions in Iran, the world could see a stop in investments in oil exploration in that country, curbing its oil output and drying the oil glut the world has been living in since 2014. With less oil on the market, the price of oil barrel would climb up again, benefitting all other oil exporters.
Another path to a similar scenario could be that OPEC would finally agree on an oil production ceiling. The group of oil exporting countries has unsuccessfully tried to reach an agreement on conjointly cutting production since early 2015. Russia, although not an OPEC member, would also be required to stop increasing production if the agreement is to have any real effect on the international oil markets. However, countries are presently locked in a prisoners’ dilemma, each looking for their own best interest, which is to produce more oil while expecting that others will cut production. Hence, trusting that all parties will comply and cut their production, is an ongoing discussion. The next chapter of this story will be released on the 30th of November, the day of the next OPEC meeting. However, after so many failed negotiations, analysts are not expecting any meaningful outcome.
The most likely scenario: low oil prices in 2017
With the Republicans ruling the Senate and House, it is very likely that Trump will be able to appoint a conservative Supreme Court Justice to occupy the vacant seat previously held by Antonin Scalia. This position of control will make it possible to have a majority ruling against the Clean Power Plan, which is being fought in federal courts and is expected to make its way to the Supreme Court next year.
A reversal of this plan means less incentive for clean energy and more laxed regulations towards coal, oil and gas production in the USA. However, with the environmental protection regulations lifted, coal becomes cheaper to produce than its counterparts. What appears at first as a stimulus to the oil and gas industry, is likely to do the reverse.
Another view that can be taken on the pro-drilling and less environmentally-friendly policies a Trump administration might pursue, is that oil companies will soon be able to explore areas in the USA considered protected or off-limits during Obama’s presidency. Some offshore fields, federal lands and possibly areas of the Arctic could be open season for oil hunting. Trump can also make pipeline construction easier to get authorized. Any of these scenarios will make room for more oil supply, which is the key reason why oil prices are still low.
In the longer run, Trump’s plan to begin infrastructural projects in the USA, will certainly increase the demand for oil. Having pro-oil policies in the USA will open the door for a production increase. However, in the short-term, the international oil markets are still regimented by the most basic of the rules: supply versus demand. As long as supply is plenty, oil prices will remain low. This is inescapable.
The author, Otavio Veras, is a Research Associate of the NTU-SBF Centre for African Studies, a trilateral platform for government, business and academia to promote knowledge and expertise on Africa, established by Nanyang Technological University and the Singapore Business Federation. Otavio can be reached at email@example.com.