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Donald Trump faces an oil price conundrum

  • Author: Jim Tankersley, The Washington Post
  • Updated: December 13, 2016
  • Published December 13, 2016

Presidents usually root for oil prices to go down, not up. That might not be true for the Trump administration.

With apologies to presidents Ronald Reagan and George W. Bush, Trump may be assembling the most unabashedly pro-drilling Cabinet in American history. Trump's picks for the Energy and State Departments are a former governor of a state that enjoyed an oil boom under his watch, and the chief executive of the world's largest publicly traded oil and gas company, respectively. They're drilling fans who would likely reinforce the instincts of a president who has promised to open vast swaths of America's lands and waters to more oil and gas exploration.

A portion of Trump's promise to speed economic growth and create 25 million new jobs rests on his commitment to leasing more federal lands and offshore areas for drilling. In the campaign, Trump's advisers estimated that such an expansion would generate nearly $100 billion a year in additional economic growth over the next decade. The source for their projections was a study by a Louisiana State University economist, Joseph Mason, published by the Institute for Energy Research, a group that champions pro-fossil-fuel policies.

Here's where the laws of supply, demand and politics kick in – and get a little weird. Mason's study forecasts the amount of drilling and job creation that would occur with the global oil price at $100 a barrel. As he explained in an email earlier this year, that was based on the International Energy Association's "forecasts at the time of the study." But oil prices today are substantially lower – just north of $50 a barrel – and the IEA's most recent forecast sees prices around $80 a barrel come 2020.

The higher the price, the more drilling activity you're likely to see in the United States. A collapse in prices led the oil and gas sector to shed nearly 30,000 jobs over the last two years. Those jobs paid relatively well, especially for workers without college degrees, a key support group for Trump in the election. If Trump wants to bring those jobs back and then some – and Mason's study suggests the short-term gain could be a half-million jobs – then he needs oil prices to rise.

"There's been a lot of rhetoric from Trump about ramping up U.S. oil and gas production, but I think there are relatively few regulatory steps they can take to achieve that," said Jason Bordoff, a former energy adviser to President Obama who is the founding director of the Center on Global Energy Policy at Columbia University. "You can open a lot of new areas, and you can scrap a lot of environmental rules, and on the margin that might slightly reduce the cost of drilling a new well. But that has a negligible impact compared to the swings of the global oil market."

The problem compounds if foreign countries approve new drilling projects that would increase global supply, as proposed Secretary of State nominee Rex Tillerson has pushed for as the head of Exxon-Mobil. Such projects would push down global prices, unless they're offset by rising oil demand.

Higher prices could reduce global oil demand, and with it, the carbon emissions that drive climate change. But they would bring other economic and political downsides for Trump. Research has found a link between lower oil prices and higher presidential approval ratings. The relatively low gasoline prices recently have spurred some increased consumer spending on other goods and services.

"The low oil prices of the last several years have had a significant positive impact on the economy," said Joshua Freed, vice president for clean energy at the centrist Democratic think tank Third Way, "but not necessarily the oil and gas industry."

None of this is Trump's doing; he will assume the presidency at a time when the hydraulic fracturing boom has made the United States a much larger player in the global oil market. Higher oil prices are still on balance bad for American consumers, but as Bordoff puts it, that's less true than it used to be. Especially for an administration so invested in drilling as a job-creation strategy.

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