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What President Trump Means for Your Energy Investments

by | published November 10th, 2016

Transitions of power in Washington, D.C., always cause some angst, but probably never more than this time.

Donald Trump has won the electoral vote while losing the popular vote, which is the second time that has happened in the past five elections. An already divided country will stay like that, and President-elect Trump’s honeymoon is likely to be very brief. Protesters have already hit the streets.

True, one party now controls both the White House and both chambers of Congress, providing some prospect that gridlock may be over. Yet for those on both sides of the ideological spectrum that may prove to be as troublesome as the inability to govern that has been so frustrating in practice.

Fundamental to this story, which will be unfolding even before the inauguration on January 20, will be what energy policies the Trump administration will pursue.

Now, on Tuesday, I explained why politicians need to resist the self-defeating pursuit of a “silver-bullet,” single-fuel energy strategy, and instead emphasize an expanding balance among energy sources.

But there are two more policies proposed by Trump that will directly affect energy investors…

Complete Energy Independence Isn’t Good for Investors

First, Trump has touted making the U.S. energy independent on a very rapid timescale. Now, as I’ve talked about here in Oil & Energy Investor before, the possibility of American energy independence was first brought into view by the enormous largess of shale/tight oil and natural gas.

When combined with the still-considerable reserves of coal around the country, and continuing advances in renewables (solar, wind, geothermal, biomass), energy independence makes for a very attractive goal.

But from the point of view of an investor, the U.S. pursuing energy independence raises some problems.

Most U.S. shale deposits are not profitable with oil prices below the mid-$70s per barrel. So producing them would require increasing prices to end users, which would have a negative impact on other sectors of the U.S. economy.

In addition, the short-term increases in drilling will cause severe local inflation spikes, and the price increases that will ripple through the fertilizer, propane, and related sectors will be bad news for rural and agricultural America.

Frankly, Trump’s emphasis on coal was an election ploy, a way to attract votes in places like West Virginia and Virginia, Kentucky, Indiana, Illinois, and Western Pennsylvania. The new American energy market cannot sustain it.

Environmental concerns aside, a new round of pro-coal policy will not translate into an adequate increase in demand. U.S. electricity production is moving rapidly from coal to natural gas and renewables. Pushing coal may well improve prospects for some select coal power plants, but it will not result in the building of any new ones.

And the upside for coal exports is limited, too…

Don’t Bet on Higher Coal Exports

U.S. thermal coal exports are very unlikely to improve given the much higher price than local sources of coal abroad. On the metallurgical coal side (the higher-quality coal needed for steel production), there may be some improvement.

Yet expansion in this global market is almost entirely governed by Asian demand. Satisfying that demand remains under the control of other providers, primarily Australia, which has the advantage of being much closer to the Asian end market.

In any event, we just don’t have the extra transport capacity that could sustain any dramatic increase in exports of either kind of coal.

Meanwhile, on the oil and natural gas side, there will be a new flurry of activity in the production basins with significant reserves and low operating costs. Leading the list here is the Permian in West Texas and Eastern New Mexico. There will be some nice opportunities for investors here very soon.

But there’s also a downside.

Oil prices will rise slowly. Yet the production curve is likely to spike beyond what is justified by actual market conditions. That will create an aberration.

The market has seen a number of bankruptcies, mergers, and acquisitions due to low oil prices and high company debt. This necessary “creative destruction” will be thrown out of whack by a new rush into drilling, delaying the “clearing of brush” necessary for higher investment returns.

Now, the second energy-related policy issue Trump raised is much more global in nature…

Trump’s Stance on Iran Could Change Everything

Donald Trump has vowed to cancel the Iranian nuclear deal.

After the initial shock from an unexpected election outcome, this issue is now surfacing among my contacts in the Middle East. And the initial reactions may be at cross purposes with the intent.

Once again, vowing to cancel the deal was an electioneering advantage and provided additional votes from folks who may well have been leaning toward Trump anyway. But actually cancelling the deal opens a huge can of worms.

The Saudis, who have not so far warmed up to The Donald, will approve. They remain locked in a struggle with Iran over who will dominate the Persian Gulf region. Any impediment to Iran selling its oil to the world means reduced export revenues for them.

That, in turn, makes it much more difficult for Iran to subsidize attacks on Saudi Arabian interests in place like Yemen, Bahrain, Syria, and even the region around Basra in southern Iraq.

Renewed sanction on Iran will also make the prospect of reaching a deal to cap oil production easier. Iran has been vocal about not agreeing to any cut in its own production until it reaches pre-sanction extraction levels. A return to sanctions (which will be the effective result of throwing out the deal) will effectively make Iran’s opinions on the cap void.

Unfortunately, it also puts OPEC back in the driver’s seat on the control over international oil pricing, and gets Iran back into the nuclear arms game. The former creates problems for American oil export prospects, and the latter is flat out destabilizing to one of the most volatile regions in the world.

Here’s the problem…

U.S. Oil Production Could Be Used as Leverage

Overall, improving the American oil sector requires that domestic volume be competitive with OPEC production. We cannot expect that to take place merely by comparing what it costs to bring the oil up. There, the cartel wind hands down.

However, by playing rising production from Iraq and Iran against the main architects of OPEC policy (the Saudis, Kuwait, and the United Arab Emirates), the organization’s impact is blunted.

We may not like it, but we can use the threat of increased U.S. oil exports as leverage to prevent Iran from adopting more radical policies. Meanwhile, lower oil exports increases prices, which is good for the U.S. oil industry as a whole.

On the other hand, poking an Iran with a metaphorical stick (in this case, renewed sanctions) is not good – and will serve to make them hell-bent on renewing the nuclear arms race.

Next week I’m flying to Abu Dhabi to discuss global energy issues with my contacts. With Trump now President-elect, it looks like I’ll have several more issues to discuss. As always, you’ll get all the details of what’s covered right here in Oil & Energy Investor.

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  1. Mark
    November 10th, 2016 at 23:59 | #1

    As a Canadian, I was wondering what your thoughts might be with Trump, In regards to the keystone oil pipeline from Hardisty Alberta to the gulf coast. The former president seemed to bow under pressure from the left and decided to not let this pipeline be built. The republicans were onside with the deal. What do you think The Donald will do if applications proceed again from Canada?
    Thanks and I really enjoy reading your articles.
    Mark

  2. Bob Schubring
    November 11th, 2016 at 02:39 | #2

    Energy Independence as championed by the Carter Administration, led to a lot of development work on coal gasification. Of all the projects designed and developed as part of that initiative, one operates today: Eastman manufactures cellulose acetate in Kingsport, Tennessee,, using gasified coal as a raw material instead of a fuel. The gasifier used at Kingsport, invented by Texaco, has been copied over a hundred times in China. Chinese utilities are firing the gasified coal in high-efficiency combined-cycle gas turbines, to generate electric power. A key part of that process is to remove nitrogen from the air feed to the gasifier, to improve the yield of gas. The Kingsport plant uses a cryogenic distillation system to perform nitrogen removal…as it was the only technology available for the purpose, in 1978. The Chinese power plants using this US taxpayer-funded technology, employ the Generon hollow-fiber membrane separation process that was patented by the Dow Chemical Company in the 1980’s. Generon membranes are used in every hospital and nursing home, to provide breathing oxygen for patients today.

    China has one enormous advantage over the US in energy development: They were recently a poor country and there is much popular demand for a higher standard of living. It makes perfect sense, in China, to bulldoze an electric power plant built in 1962 that was 35% efficient, replace it with a Generon oxygen concentrator, Texaco gasifier, and a pair of Westinghouse combined-cycle turbines that are 51% efficient, produce half again the electric power with the same tonnage of coal, and keep the mine workers employed.

    In the US, it’s politically easier to cook up some poppycock about global warming, fire the mine workers and put them on welfare, charge them criminally with using drugs to relieve the aches and pains of work-related injuries, lock them in prison, and write gobs of social-science psychobabble reports.

    The reason for this, is that we wasted a lot of money creating university teaching jobs, to teach the fine art of concocting psychobabble and making it seem believable. The graduates who incurred hundreds of thousands of dollars in student-loan debt, must appear to be employable in some capacity, or else new students would pass up the universities entirely and take a short course at a trade school to learn something useful.

    The anti-elitism of Donald Trump’s backers, is reminiscent of China’s Great Proletarian Cultural Revolution in the 1960’s. That, too, was an anti-elitist movement. It was considerably more brutal than the American version…nobody here is being shipped off to re-education camp…but the message is similar. The mere possession of an intelligent mind, is not sufficient to earn the respect of other people. It’s our making use of our minds, to create value that actually helps our neighbors in some way, that gives our neighbors a reason to treasure us for what we’ve done.

    If there’s a sector of the US economy that’s unprepared for a Trump shock, it’s the educational system and the people who work in it. Trump isn’t Mao Zedong. The Young Republicans aren’t the Red Guard. There probably won’t be public torture sessions for university professors who show elitist tendencies here. There are, however, law courts, and there exists something called the False Claims Act, under which anybody who got federal research money under false pretenses, can be imprisoned and a university that took money under those circumstances, can be forced to return the money. If students can be forced to repay every penny of student loan money spent on their education, universities can be forced to offer real value for the money spent.

  3. Darrell
    November 11th, 2016 at 09:40 | #3

    Your comments are aimed at the good of energy investors only. But most of us (I hope all of us) invest in more than just energy. That said,
    1. The removal of Obama’s overly restrictive sanctions against coal
    will reduce energy costs, help us keep that blend of energy
    sources
    you correctly state is a good idea. It will help put some people
    back to work and off welfare roles in states like WVa.
    2. Energy independence for North America is a good idea because it
    keeps money here in this hemisphere, and reduces our dependence
    on the Mid East.
    3. Cheaper energy is good because a.) It is more money in the pockets
    of the consumer to spend elsewhere and b.) It is a helpful for
    manufacturing jobs (highly dependent on energy costs).
    4. Cancellation of the agreement with Iran won’t put Iran back in
    the nuclear arms race — they are still there. They aren’t
    building long range ballistic missiles to put conventional
    warheads on them. Obama’s agreement just means their development
    of the Bomb is just delayed a little. We need to stop it.

    So while I appreciate your comments as pointed just at energy, let’s give Trump’s policies a chance. There is more at stake here than just whether our energy stocks go up.

  4. Rich Pankhurst
    November 14th, 2016 at 12:14 | #4

    @Bob Schubring Surrounding myself with people smarter than me has allowed me to advance my thoughts. Thank you for your articulated and scientific comments.

  5. Ross
    November 15th, 2016 at 08:57 | #5

    Amen. You hit the nail on the head. I agree with you. I don’t believe Iran has stopped working on a nuke either.

  6. November 18th, 2016 at 09:59 | #6

    @Bob Schubring
    I believe that the Universities have been compromised to the same degree as the Media. It’s about time they were brought back to reality. I enjoyed reading your piece.

  7. Robert
    November 18th, 2016 at 17:38 | #7

    How can I invest in this i have so much money at times I get a government. Pay check can. Please let me know how I can invest with. Sow little

  8. michael Reynolds
    November 29th, 2016 at 20:12 | #8

    Bob, what a wonderful and eloquent commentary. Thankyou!
    I adore people of magnificant perception
    Who can articulate that perception as you
    Did.
    With literary affection
    Mick Reynolds
    @Steele Notes Magazine.

  9. Jon
    December 6th, 2016 at 18:20 | #9

    What rock are people living under?

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