With less than three months to go before the November 3rd election, President Donald Trump finds himself between a rock and a hard place over oil prices.
According to the latest data from the U.S. Energy Information Administration, domestic gasoline prices at the pump remain low at about $2.17 per gallon.
That’s about 50 cents below the average price of a gallon of regular a year ago, providing relief to those Americans who can’t work from home and still must drive to their jobs during the Covid-19 pandemic. Many wage workers have been pushed to the edge by the loss of hours caused by the government-mandated shutdowns of Main Street and every bit of savings help.
Low prices at the pump are good news for the president, who has long considered the corner Exxon sign as a crucial indicator of public sentiment.
But President Trump has also been a big backer of the oil and natural gas industry, which expanded in recent years to become a top global producer alongside Saudi Arabia and Russia. The industry has become an important part of the economy, supporting some 10 million jobs.
But U.S. oil and gas companies, even majors like Exxon Mobil and Chevron, are struggling to show a profit with low crude prices.
U.S. benchmark West Texas Intermediate (WTI) crude has rallied from its historic plunge into negative territory in April, stabilizing above $40 a barrel in recent weeks. But producers are still drowning in red ink, and second-quarter results were dismal as most shale plays remain uneconomic at current oil prices.
Prominent producers like Chesapeake Energy, Whiting Petroleum, and California Resources have filed for bankruptcy, along with a host of smaller producers. Those firms still standing have implemented dramatic cost-cutting measures, including widespread layoffs, payroll cuts, and shrinking capital expenditures to survive.
Even with all of the belt-tightening, the oil and gas industry is still operating on a knife’s edge. According to a study by Deloitte, about 30 percent of shale operators are technically insolvent at $35-a-barrel, so prices in the low $40s is hardly a victory.
The pandemic and subsequent collapse in global demand endanger President Trump’s “energy dominance” goal even as his administration continues to approve new export licenses for liquified natural gas at a record pace.
U.S. oil production has dropped by 2 million barrels-a-day from its record level of 13 million barrels-a-day before the pandemic. Drilling activity in the shale plays across the country has plunged to a record low, with just 247 rigs operating nationwide as of August 7, according to Baker Hughes, which tracks the number of active drilling rigs. While peak oil theory may be in the dustbin, 2019 is increasingly looking like peak demand.
In late July, President Trump visited West Texas, the heartland of the oil industry in the United States, and cast himself as the savior of the state’s economy. Trump used the visit to highlight his record in easing regulations on energy production and criticized Democrats for wanting to phase out the industry. But the political landscape in reliably red Texas has shifted, and Trump now finds himself in a tight race with Democrat Joe Biden in a state he won decisively in 2016.
Texas may not be ready to be a swing state, but oil and gas producing states aren’t the bulwarks for Republicans they once were. States like Pennsylvania and Ohio were critical to Trump winning the White House in 2016, but are now very much in doubt.
While President Trump has gone to bat for the oil and gas industry during the current crisis, many in the business wonder if he’s not all hat and no cattle.
In April, Trump helped broker a groundbreaking agreement with OPEC and its partners, mainly Russia, to cut production by 9.7 million barrels a day. That deal, led by Saudi Arabia and Russia, pulled oil prices out of a nosedive and stabilized the market. Trump leveraged his strong relationship with the Saudi leadership to push that deal forward.
But the U.S. oil industry remains on life support, and the OPEC-plus alliance has begun to ease supply cuts, adding 2 million barrels a day to world oil markets starting August 1.
The additional supply comes just as economies have had to shut back down because of a nationwide spike in COVID-19 cases. Once again, rising oil supplies and falling demand threaten to collide to put additional downward pressure on prices.
Again, low prices at the pump are good for Americans with somewhere to go but with a growing number of cities clamping down on public activities and offices canceling plans to reopen – not to mention schools not reopening – many Americans are hunkered down with no need for gasoline. Meanwhile, producers and refiners are looking at a bleak future that will leave them in a sour mood come November.
Trump could try again to press Saudi Arabia to ratchet back production. Another supply cut would send a positive signal to the market, but it would likely rile other parts of the country that don’t rely on energy jobs to drive their economies, including crucial electoral college states like Florida, Michigan, Wisconsin, Iowa, Minnesota, Nevada, Georgia, North Carolina, and Georgia.
There’s also the risk that the Saudis don’t take the president’s call. Riyadh can see the same polls showing Biden leading the presidential contest as the rest of us. President Trump’s relationship with the Saudis has been pivotal to both sides. Nothing lasts forever, and Riyadh has to start thinking about how it will protect its interests in the volatile Middle East under a less hawkish Biden administration.
President Trump is stuck with the current oil market, for better or worse, as Election Day draws closer. There’s no rabbit to pull out of the hat in the shale patch.