US ‘energy dominance’ will trigger global shifts

Reuters/Lucas Jackson

“Fantastic”, one anonymous Saudi official told S&P, on hearing of Donald Trump’s nominee for US energy secretary, Chris Wright. 

Wright is founder and chief executive of Liberty Energy, an oilfield services company, and an outspoken supporter of fossil fuels.

But as the second Trump administration promises a repeat of its “energy dominance” strategy, who is going to be dominated?

The nominee for energy secretary is at least a serious industry figure, unlike some of the bizarre proposals to fill other posts. Wright notes in his biography past work in geothermal and solar energy, and is on the board of a developer of small modular nuclear reactors. 

Wright does not deny that human-caused climate change is occurring, but he believes the economic impacts will be relatively minor.

He advocates for the expansion of all viable energy sources, particularly US oil and gas, and points to the great advances in human wellbeing over the past two centuries enabled by abundant and cost-competitive energy. 

He does not believe that wind and solar can be a major part of energy supply, and dismisses “subsidies for clean energy”.

Perhaps even more important for US energy output is the interior secretary, who controls leasing of federal lands for hydrocarbon and mineral exploitation. Nominee Doug Burgum is governor of North Dakota, home to the shale oil from the famous Bakken Formation. His office can also speed or, more likely, slow down renewable energy development.

These two gentlemen will seek to raise US oil and gas output and exports. One of Wright’s first actions will no doubt be to cancel the moratorium on new liquefied natural gas (LNG) exports, imposed by President Biden in January, which was indeed misguided. 

Regulations on the industry will be eased. Some capital currently sitting on the sidelines will come back. There may be renewed efforts to drill in contentious areas, such as the Arctic National Wildlife Refuge in Alaska.

But these will have minor effects, particularly during a four-year presidential term. The LNG projects under moratorium would be unlikely to have been completed before 2030 anyway, and exploring and drilling in new areas also takes years. The industry complains loudly about minor regulations, even while US oil output has hit new record levels under Biden.

By far the most important determinants of US petroleum output, as they always have been, will be oil and gas prices, technology, and industry structure. 

It is likely that Opec+ will continue to struggle to raise output, or will have to accept lower prices

If Trump were somehow successful in raising US oil and gas output significantly, prices would fall, hitting the profits of oil companies and service providers such as Liberty. That would in turn curtail drilling. Gas producers cut back output this year, faced by persistently low prices.

Trump, in his campaign, promised to bring down Americans’ energy costs by half within a year. Short of a massive recession, that will not happen. Prices may even rise, depending on the scope of his promised tariffs, 10 percent on all imports, which would hit the major purchases of oil and gas from Canada and Mexico.

As US shale plays mature, improved technology and cost-cutting have to keep up with a depleting resource base. So far, the industry has managed that, but with a slowing rate of growth. And the scrappy independent companies, including a couple founded by Wright, which dominated the early shale revolution, have mostly disappeared from the scene. 

The shale patch has consolidated around the traditional super-majors, ExxonMobil and Chevron, and a few big independents such as Occidental and EOG. They can invest more steadily through industry cycles, but will not go for breakneck expansion.

The future of “energy dominance” beyond the US also hinges on prices and how the White House tackles geopolitical rivals. It is likely that the Opec+ alliance will continue to struggle to raise output, or will have to accept lower prices. The advent of Trump makes that task marginally more difficult, but the problem lies mostly in weak Chinese demand and strong oil output throughout the Americas.

The president-elect’s emerging foreign policy team looks very hawkish on Iran. In his first term, Trump ripped up the nuclear deal negotiated under Barack Obama, and imposed stringent sanctions in 2018 in a policy of “maximum pressure”. Iran’s exports dropped to near-zero in early 2020, though the Covid pandemic was primarily responsible.

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Under Biden, better Iranian evasion and laxer enforcement enabled Tehran to export 1.85 million barrels a day of crude oil and condensate in September. A revival of maximum pressure can probably cut that again, but not to anywhere near zero.

Spare Opec capacity in countries such as Saudi Arabia and the UAE can fill the gap, but Iran will not passively accept economic collapse. 

Such a scenario threatens more disruption, threats to oil facilities and transit, as in the Red Sea, or even to a wider conflict, with dangerous and unpredictable consequences.

Stricter enforcement will also involve putting more pressure on China. Bbut the Trump administration’s leverage over Beijing may be limited, especially given plans for an effective trade war. 

Additionally, there appears to be a division within the administration between Russia hawks and doves. While sanctions on Russia’s oil have succeeded in redirecting its exports rather than significantly reducing them, these sanctions remain largely under European control.

Energy dominance implies that someone will be subordinated. Could that be Europe, which relies on US LNG as an alternative to Russian energy? Or oil market competitors such as Saudi Arabia and Opec+? Perhaps geopolitical and energy adversaries such as Iran and Russia? Or economic rival China?

Maximum pressure on a balloon can cause it to pop out somewhere else: the White House will have to choose between squeezing Tehran, Beijing or Moscow.

Robin M Mills is CEO of Qamar Energy and author of The Myth of the Oil Crisis