Essay by Eric Worrall
h/t MyUsername – According to Huff Post journalist S.V. Dáte, the USA needs to keep gasoline prices high to prevent economic ruin.
Trump Is Promising Cheap Gas. Too Bad Getting It Would Likely Crash The Economy.
Oil industry experts agree there is no way he can deliver $1.70-a-gallon gas without destroying the domestic oil industry and triggering a deep recession.
By S.V. Date
Aug 22, 2024, 08:00 AM EDT…
The problem, industry experts explained, is that energy is bought and sold in a global market, and the only way that gasoline could go from $3.40 a gallon now down to $1.70 a gallon is for crude oil prices to fall from $75 a barrel to between $20 and $30 a barrel. And at those lower prices, U.S. oil producers would not be able to break even.
“That would bankrupt the U.S. industry. And the entire U.S. industry would shut down before that happened,” said one oil executive with decades of experience who spoke on condition of anonymity to avoid antagonizing Trump and his campaign. “It’s classic Trump. He speaks hyperbolically without making any common sense.”
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Matt Randolph, another oil industry executive with more than three decades of experience in the business, frequently posts videos on social media lampooning politicians ― both Democrat and Republican ― for their claims about energy.
In a video he posted last week following a previous instance of Trump’s half-price promise, Randolph laughed at Trump’s pledge, laying out a scenario of oil industry layoffs triggering a recession. “This may be one of the dumbest statements that Donald Trump has ever made,” he said in closing.
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With no market mechanism to slash prices that sharply, Trump would be left with government action. “The only other way is massive subsidies to the American consumer,” Randolph said. “And that isn’t going to fly.”
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Read more: https://www.huffpost.com/entry/donald-trump-half-price-gas-promise-recession_n_66c68217e4b01c59f9de051f
The most disturbing part of the Huff Post article is it seems an incredibly lazy piece of journalism.
Why does “S.V. Dáte” accuse Trump of planning government subsidies? There is no evidence in the article that Dáte approached Trump for an explanation, he just flew into a wild flight of fantasy about Trump pushing damaging government backed subsidies.
Dáte’s other points seem just as weak. Matt Randolph, whom Dáte quoted, seems to think there is no point producing more oil in the USA.
… Randolph: We’re currently producing 13.3 million barrels of oil a day. For 2023, we averaged 12.9. And that was a record year. So, we will set another record in 2024. But I don’t expect us to increase oil production much more this year because as we increase it, OPEC just continues to decrease. It’s hard to say what the benefit is for us to continue increasing oil production if they’re just going to maintain high prices. …
Read more: https://www.tpr.org/news/2024-04-28/matt-randolph-aka-mr-global-sets-the-record-straight-on-the-u-s-oil-and-gas-industry?_amp=true
Even if Randolph is right about prices, which I doubt, Randolph’s argument completely ignores the benefits of US businesses and workers being enriched by oil profits, instead of the money ending up in the hands of Middle Eastern oil sheiks. Improving the balance of trade by reducing outflows of US cash would also improve dollar purchasing power and reduce upward pressure on inflation and interest rates, even if pump prices didn’t come down immediately. In addition if US production rises fast enough, there would likely come a point when OPEC solidarity would crack, and producers would break ranks to try to squeeze as much profit as possible from a falling market. There is evidence OPEC’s control of oil prices and member production levels is much weaker than they like to portray.
I’m not accusing Randolph of ulterior motives, but there is a very obvious reason some big oil players might prefer Biden / Harris policies over Trump policies. Biden / Harris have passed laws which create a significant competitive advantage for big oil companies over their smaller competitors.
Only big companies with big legal and accounting departments can comfortably afford environmental compliance costs under Biden / Harris.
Texas Oil & Gas Commissioner Slams Biden Administration’s Job-Killing Oil & Gas Rules
December 05, 2023
AUSTIN – Railroad Commissioner Wayne Christian issued the following statement regarding new onerous methane rules proposed by the Biden administration’s Environmental Protection Agency (EPA).
“While costs for hard-working Americans are up nearly $11,000 this year everywhere from the gas pump to the grocery store, President Biden’s solution to inflation is to increase regulations that will make American oil and gas more expensive,” said Commissioner Christian. “Petroleum helps make more than 96% of everyday consumer items like plastics, food, medicine, and more. These new rules on U.S. oil and natural gas producers will certainly drive those prices up.”
“These new rules are likely to have a disproportionate impact on smaller producers, which make up more than 83% of U.S. production. At a time when producers are facing financial drought from Wall Street and political headwinds from Washington Democrats, that last thing the industry needs is more bureaucratic red tape stifling business,” Christian continued. “It’s hypocritical to kill clean fossil fuel jobs here in America claiming it ensures a clean environment, and then beg our foreign adversaries to produce more using much less environment-friendly methods. Americans are struggling with high prices and the answer to that strife is simple—more U.S. oil and gas production.”
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Read more: https://www.rrc.texas.gov/news/120523-texas-oil-gas-commissioner-slams-biden-administration-s-job-killing-oil-gas-rules/
All the environmental regulations introduced by Biden / Harris may be driving financially distressed small companies into the arms of larger players, either through outright mergers, or by joining big company umbrella groups, in return for big company help with compliance. Even those small players which retain some independence under the new order may no longer feel completely free to compete and undercut the prices of big companies they rely on for protection from Biden / Harris government bureaucracy.
US oil, gas M&A activity jumped 57% last year amid industry consolidation
By Nicole Jao
August 21, 202412:21 AM GMT+10
NEW YORK, Aug 20 (Reuters) – Dealmaking activity in the oil and gas industry increased 57% last year as energy companies boosted development spending, driven by higher cash flows from profits in prior years, according to a report released on Tuesday.
Top energy companies spent $49.2 billion on mergers and acquisitions in 2023, up from $31.4 billion in 2022, according to a report, opens new tab from Ernst & Young. The increase was mainly driven by mega deals among integrated oil and gas companies.
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Companies flush with cash were focused on driving efficiency through scale and leveraging existing operations, he said.
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Read more: https://www.reuters.com/markets/commodities/us-oil-gas-ma-activity-jumped-57-last-year-amid-industry-consolidation-2024-08-20/
If Trump sweeps aside the bureaucracy, opens new areas for exploration, and restores full market access for lean, low cost independent operators, liberating small players to try to pull down prices, consumers will benefit one way or another. But the impact on the profits of some big energy players which have spent all their cash on buying distressed small operators could be devastating.
Instead of using their market dominance to keep gasoline prices high, pocketing fat profits squeezed from the misery of ordinary consumers, big players who have taken advantage of Biden / Harris market distortions by spending all their cash buying distressed small players could suddenly be forced to compete on a level field with lean, efficient, small scale operators who resisted the buyout spree, right in the middle of a difficult consolidation exercise triggered by all the buyouts. The fat cats might have to take pay cuts. Some of them could even lose their jobs.
Dáte could have learned all this if he bothered doing a little extra research. The fact such a sloppy piece of orange man bad journalism saw the light of day, complete with a straw man fantasy about Trump’s policy platform, in my opinion affirms the plummeting journalistic standards of what today passes for mainstream media.
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I listened to some economic experts on CNBC several years ago, and they said that for every $0.80 increase in the price of a gallon of gasoline, the U.S. Gross Domestic Product (GDP) decreases by about one percent, and for every decrease of $0.80 per gallon of gasoline, the U.S. GDP increases by about one percent.
The price of gasoline when Trump left office was about $1.87 per gallon. Today the cost of gasoline is about three dollars per gallon, and over five dollars per gallon in some States.
So how much has the increase in the cost of gasoline cost the American economy since Biden-Harris were elected?
If the price of gasoline declines, this will benefit the economy of the United States. Any reduction in price will be a positive.
Gasoline and diesel are retail goods in a fairly elastic market which conforms to the usual supply, demand, price behaviour. Suppliers do not set prices – except notionally – consumers do, what the market will bear.
This is why pump prices for motor fuels – influenced by refinery output, retail costs, consumer demand – do not directly track oil prices, leading to accusations of profiteering when oil prices go down, but pump prices do not, or pump prices go up even though oil prices are stable.
Oil is a raw material in a fairly inelastic market where prices are less sensitive to supply and demand, and is the starter for many products other than motor fuels.
To claim that if pump prices were slashed this would drive down the price of oil, is like claiming if supermarkets slash bread prices, this would drive down the farm prices of cereals.
A low oil price would bankrupt the Russian war effort. Cut off funds to Ukraine at the same time and you have a peace deal.
For years the Saudis ran the US economy to maximize OPEC profits by increasing and decreasing oil supply.
The idea that US producers can not make money at $20 a barrel is nonsense. Alberta heavy oil has been making money at that price for decades due to lack of pipelines to the coast. Not dancing in the streets money, but enough to keep the lights on.
Canada had price controls under Trudeau Senior. It killed wages and oil production while inflation soared. It took a decade after Trudeau resigned for Canada to recover. Now we have Trudeau Jr who has wrecked the economy through sky high housing costs from bringing in millions of “new Canadians”. The equivalent of the US admitting 40 million aliens to settle in the US.
During the Clinton years oil was $12 a barrel and the economy was great. A large part of Clinton’s appeal was that he didn’t bankrupt the country with rules and regulations. So long as he was getting his, he was OK with everyone else getting theirs.
Canada had a National Energy Program to deal with oil prices. The program set the target price of oil at $90 a barrel. The value of the Canadian dollar promptly crashed and interest rates soared until oil in Canada hit $90 a barrel. It wasn’t oil prices changing, it was the Canadian dollar heading for the toilet. Price fixing is the quickest known way to break the economy.
Eric: What happened? All of a sudden you and Trump are singing from the Bernie Sanders / AOC oil profiteering song book. Trump is nuts on this one. Gasoline taxes and refining distribution cost about $1.50 a gallon. To get to $1.70 a gallon, the price of oil would have to collapse to $20 a barrel, which for sure would bankrupt the whole industry. Fracking, our key new supply of domestic oil costs nearly $60 a barrel. Forcing oil prices much below $70 a barrel would shutdown and bankrupt that whole sector. Killing fracking would force us to start importing Arab oil once again, which is why I’m sure the Arabs, and Russians, are secretly backing the anti-fracking environmental crazies. Yes, Biden Harris have many crazy anti-energy regulations, but ending them would save pennies, not dollars a gallon. Trump is as crazy on this proposal as Harris is on her grocery store profiteering. Grocery profits are a whole 1% of grocery prices and oil profits are about 5% of gasoline prices.
I don’t think we’ll ever see $1.70 per gallon again, but not because of a failure of Trump’s ideas. The Biden/Harris inflation just means that it might drop to $2.50 a gallon or so, but when you make the inflation adjustment, it works out to the same price.
BTW, the same principle also applies to the stock market. New highs on the Dow? Big deal.