Energy

Liam Denning is a Bloomberg Gadfly columnist covering energy, mining and commodities. He previously was the editor of the Wall Street Journal's "Heard on the Street" column. Before that, he wrote for the Financial Times' Lex column. He has also worked as an investment banker and consultant.

It's morning in America's fossil-fuels business.

President Trump just signed off on two totemic pipeline projects, and he dismisses "burdensome regulations" on miners and drillers and wants to open up more federal land for them. He also toys with tax policies that favor exports and penalize imports, with energy possibly included.

One thing that should be abundantly clear at this point, though, is that what's good for America's fossil-fuels business isn't necessarily great for the rest of the industry:

Made In America
The U.S. shale boom helped to upend the global oil market in late 2014
Source: Bloomberg
Note: Indexed to 100.

The chart above shows oil, but one on natural gas would look more or less the same. With coal, the trends are a bit more nuanced: U.S. output has been falling in response to lower demand, chiefly because of competition from all that natural gas. In all three cases, excess supply has pushed prices down and American energy exports up -- transmitting that price pressure to the wider world.

The other thing to bear in mind is that U.S. shale oil and gas operates on a faster timetable than most other types of supply. The critical input is capital. And, as the past two years have shown, shale production costs have been dropping, with at least some of that decline likely to last.

All of which means that, if shale was a shock to the market, then the new U.S. administration is a big aftershock. Think of it this way: The country with the biggest potential to ramp up oil and gas supply quickly is adopting policies tailor-made to encourage just that.

Take Dakota Access, for example. If Trump's signature clears the final barrier to completion, then the pipeline could be up and running later this year.

Assuming 90 percent utilization, it could carry 450,000 barrels a day from the Bakken shale basin toward refineries on the Texas coast, according to Afolabi Ogunnaike, a senior analyst at Wood Mackenzie.

Bakken output has been falling since December 2014 as E&P companies have shifted focus to lower-cost regions such as the Permian basin in Texas.

Bakken Down
Bakken oil production has declined by 235,000 barrels a day, or 19 percent, in the past two years
Source: Energy Information Administration

One reason the Bakken lost out is that about 200,000 to 300,000 barrels a day has to be shipped on higher-cost rail cars due inadequate pipeline capacity. Railing oil to the Gulf Coast costs about $12 a barrel compared with $7 for a new pipeline, Ogunnaike estimates. With Wood Mackenzie estimating the average breakeven price of Bakken production now being around $52 a barrel, that $5 spread is significant.

More pipes, more land, and a generally looser approach to federal regulation won't spark a boom on their own. Lower frictional costs will shift some marginal prospects into the viable column, though. Still, prices remain paramount.

This is where a new tax policy could really step things up. As I explained here, a border-adjustment tax would tend to leave U.S.-produced oil trading at a big premium to international crude.

In a report published this week, Goldman Sachs estimated that, at a 20 percent tax rate and current Brent crude oil prices, West Texas Intermediate might immediately swing to a premium of $10 a barrel. Under this scenario, Goldman forecasts U.S. oil output might rise by 1.5 million barrels a day in 2018, almost double its current projection. And higher oil production usually means extra gas along with it, meaning that market would also be affected.

This would throw down a gauntlet to OPEC and other countries -- including Russia -- trying to support oil prices with supply cuts. They could choose to take more barrels offline to make way, but that could just create more room for U.S. producers to take more market share -- the same dilemma that has been dogging them since 2014. In all likelihood, international crude prices would instead fall in an oversupplied market, taking U.S. prices down with them (although still at a tax-induced premium).

We shouldn't forget the demand side of the picture: After all, the president's aim is to boost U.S. growth.

The difficulty is that, when it comes to demand, the U.S. definitely isn't in the driver's seat. America's economy just isn't as oil-intensive as it used to be:

Fuel Efficient
The amount of oil required to produce a dollar of U.S. GDP has dropped by 61 percent in the past 40 years
Source: Bloomberg
Note: Oil consumption divided by real U.S. GDP.

On average, U.S. GDP has increased by 2.4 percent annually in the two decades through 2015. Oil demand rose by about 0.5 percent a year, roughly 20 percent of the economy's pace, but with all the growth happening in the first decade.

Say, in very crude terms, U.S. GDP grew by 4 percent now -- something it hasn't done since the dot-com bubble in 2000 -- and increased manufacturing helped push the oil-to-GDP growth ratio back up from about 20 percent to 40 percent. Under this scenario, oil demand might rise by around 300,000 barrels a day.

That number, replete with caveats as it is, would be significant.

But it would be naive to focus only on the perceived benefits of upending decades of trade policy without considering the risks.

Emerging markets, which are most vulnerable to swings in trade and the dollar, account for virtually all of the projected growth in global oil and gas demand. Cut projected growth in oil demand from non-OECD countries by half a percentage point, for example, and you wipe out 250,000 barrels a day. Bang goes most of the America First bonus.

What the new president's all-of-the-above (at least for non-renewables) approach to energy portends is a shot of extra supply in oil, gas, coal and even electricity markets (see this) that are already trying to clear excess supply. For domestic E&P companies, their services contractors, and, to a much lesser degree, miners, this will provide a welcome growth spurt.

For the global energy markets, it is a deflationary force, potentially setting up another boom and bust cycle in short order. The volatility could be heightened by the renewed economic pressure put on energy exporters. Consider, for example, what could happen to Venezuela if its sales of heavy oil to U.S. refiners are undercut by Canadian barrels flowing through a revived Keystone XL pipeline.

As with trade, "America First" in energy implies someone is going to come in last.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Liam Denning in New York at ldenning1@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net