America's one million b/d of crude oil for president

Brian Scheid spoke this week at the Platts Global Crude Oil Summit in London and gave some insight into one of the biggest variables around US oil: the next president.

Let’s call it the 1 million b/d race, even if such speculation may ultimately prove wildly wrong.

In short: no one can accurately forecast the impact of the outcome of this November’s US presidential race. This is partly because neither Hillary Clinton, the Democrat’s likely candidate for the White House, nor Donald Trump, the presumptive Republican nominee, have laid out the specifics of their energy policy hopes. Nor is it clear how many of these policies may bear fruit.

More importantly, the race for the White House and its subsequent effect on global crude oil market fundamentals will not happen in a vacuum. A coordinated supply cut by OPEC, a collapse of Venezuela’s economy, even a pronounced return of Libyan oil to the world market will likely impact fundamentals deeper than whatever happens in November’s election. In addition, if oil prices sink below $30/b again or return to levels above $70/b, the new White House tenant’s influence on crude supply and demand may ultimately be inconsequential.

There are so many variables that the US Energy Information Administration, which forecasts everything from where Brent spot prices will be trading next year to how much a single Eagle Ford rig may produce next month, does not forecast the impact of election outcomes on oil, or any other energy markets.

Several analysts cautioned that trying to predict the market impact of the likely race between Clinton and Trump was a fool’s errand at best and pretty much impossible. But they did offer a best case/worst case view that a Clinton win would broadly decline production, by as much as 500,000 b/d, and a Trump win could boost production by as much as 500,000 b/d. So, the election could have a 1 million b/d swing, even if such a prediction is informed speculation, or, as some might more accurately put it: a guess.

That being said, this presidential race is shaping up to have a major impact on the direction of US and, possibly, global oil supply and may have the most significant impact on oil policy of an election in American history. This is partly due to the increasing move away from middle ground in American politics which has clearly been accelerated amid the presidential primary races. This has caused candidates who may have a more nuanced view on energy policy, such as conditions on fracking on public lands, to a more extreme view, such as an all-out fracking ban.

Factor in the likelihood that the partisan balance of Congress and the Supreme Court will also be decided by voters in November, the possible shift in US oil policy may be unprecedented.

With all these moving parts and potential variables, here are some of the key possibilities for crude markets if Clinton or Trump win in November.

If Trump wins

While Trump has offered few specifics on his energy policy goals, he has indicated that several extreme possibilities, such as a ban on Saudi Arabian crude imports, are being considered.

Possibly the bigger crude policy game changer is the possibility that Trump could void the historic nuclear deal with Iran, a result which could put a massive sanctions regime back in place and might limit access by US allies to the US financial system.

President Obama has made efforts to combat climate change a legacy goal. This includes new rules to cut methane emissions from oil and gas wells, making it harder to drill on federal lands and, arguably, more expensive to drill anywhere else. He’s also limited the offshore areas where production can take place and has come up with strict new technical standards for drilling both on and offshore.

As president, Trump would likely try to gut all that. The costs, the burdens of federal regulations on oil and gas drilling could go away. In essence, it would be easier and less expensive for a US producer to produce.

Trump could also look to weaken fuel economy standards set by the Obama administration, creating a major demand boost, and might look to open more federal waters to oil and gas production.

The Obama administration seems to want to concentrate offshore production to only one area: the Gulf of Mexico. They recently took a planned oil and gas auction for parcels in the Atlantic Ocean out of their upcoming five year lease sale plan. And after Shell’s missteps in the Arctic, they seem to be taking great pains to keep any drilling from taking place offshore Alaska. In October, the administration cancelled two planned sales of Arctic oil and gas leases: a sale planned for this year in the Chukchi Sea and one planned for next year for parcels in the Beaufort Sea.

Trump could put everything on the table: Atlantic lease sales, Arctic lease sales, more Gulf drilling, maybe even the Pacific. There are some timing issues with that, since they couldn’t undo Obama’s leasing plan through 2022 without considerable delay and effort. But all available US waters could conceivably be opened up to oil and gas drilling within a decade.

Just because those waters are available, however, doesn’t mean producers would necessarily want to develop them. Like the impact of the election, there are a lot of variables at play.

In addition, if Trump moved to open more public land to drilling, as many expect he would do, it’s unclear if such a move would be met with much enthusiasm from producers.

If Clinton wins

If elected, Clinton has pledged to, within a decade, “reduce American oil consumption by a third through cleaner fuels and more efficient cars, boilers, ships and trucks,” according to her campaign website.

While the potential path isn’t entirely clear, the oil and gas industry is nervous that Clinton could move toward banning fracking on public lands, cutting off the possibility of future production. Clinton has outlined conditions for fracking on public lands, including needed approvals from states and municipalities and chemical disclosures, but industry lobbyists stress these conditions could become a de facto ban.

The main view on a Clinton, or Senator Bernie Sanders, presidency, is that it would essentially continue and push President Obama’s efforts to combat climate change further. So a plan to limit methane emissions from new oil wells gets expanded to emissions limits on all wells.

Maybe a $10-per-barrel tax on oil that Obama pitched earlier this year, but went nowhere, gets resurrected in a Clinton White House. In addition, elimination of tax incentives oil companies get for drilling in the US would likely get a hard look.

Perhaps a Clinton White House would get more ambitious with federal gas mileage standards, going beyond 54.5 miles per gallon goal in 2025, further decreasing gasoline demand.

A big difference will likely be offshore drilling. Instead of keeping the Atlantic Ocean free of oil and gas drilling for the next five years as the Obama administration has proposed, it would likely be kept out of there for 10 or 15 years by a Clinton administration.

More parcels offshore Alaska would likely be taken off the table; maybe US producers never return to offshore Alaska until a Republican wins the presidency. Maybe future lease sales in the Gulf of Mexico are cancelled. This is major from a supply standpoint.

Despite the impact that prices have had on the US shale revolution, Gulf of Mexico production is expected to hit record highs in 2017, averaging 1.63 million b/d in 2016 and 1.79 million b/d in 2017.

If you’re enacting policy that potentially cuts US Gulf production then you’re talking about cutting into one of the few sources of US supply that increases even in a bust cycle.

Even without specifics, this election matters deeply to fundamentals and will be a key moment for US producers and the path of supply. Who wins in November may dictate if the US shale renaissance peaked 9.75 million b/d in April 2015 or if this year has been a dip ahead of a new high.

Of course, if oil returns to $100/b, even $70/b, it may not matter much to producers who is in the White House.

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