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What happens when the world’s largest oil producer goes all-out to boost production just as the appetite of the world’s largest oil importer may be peaking? Demand from China — which has accounted for half of all world oil demand growth over three decades — shows signs of levelling off thanks to slowing economic expansion and an epochal shift to green power and electric vehicles. Returning US President Donald Trump has, meanwhile, declared a national energy emergency intended to boost fossil fuel output, and begun to reverse the Biden administration’s green agenda. In theory, these dynamics might lead to an oil glut and falling prices. The reality is more complex.
The US-China divergence is at root about competing visions of energy security. Beijing’s embrace of renewable energy reflects less a noble conversion to saving the planet, and more a strategic determination to reduce dependence on imported oil. Conversely, alongside the popularity of his “drill, baby, drill” mantra among consumers balking at the costs of the green transition, Trump does not want the US to rely on a green energy supply chain dominated by China.
Trump’s Treasury secretary pick, Scott Bessent, suggests America can produce an additional 3mn barrels of oil-equivalent a day by 2028. There may be scope, in time, to lift output of natural gas, which the president is eager to export to Europe. For all the rhetoric and deregulation, however, US oil production — which at 13mn b/d is already a record for any country — will be much harder to raise. Producers are unlikely to boost drilling a lot at current US benchmark prices of about $75 a barrel; a recent survey found oil groups needed a $65 price for drilling to be profitable, and $89 to justify a substantial increase.
At the same time, exports from some other suppliers may fall — thanks to US actions. The departing Biden administration this month imposed stiff new sanctions on Russian oil, which by some estimates could remove up to 2mn b/d from the market. The new US president threatened this week to go further unless Vladimir Putin strikes a deal to end the war in Ukraine. Tougher US moves to restrict Iranian exports, in line with Trump’s first-term approach, could take hundreds of thousands of barrels a day more off the market.
This would open a potential opportunity for the world’s swing producer — Saudi Arabia; the Opec consortium has for months been holding back planned production increases, to balance the market with Chinese demand drooping. Trump’s programme could then lead ironically to Saudi Aramco, more than US oil companies, opening the spigots. (Addressing the World Economic Forum on Thursday, the US president explicitly called on Opec to push down global oil prices.) For Trump, this could create leeway to pursue his geopolitical goals without pushing up prices at the pump. Even if US oil producers do not end up raising their own output by much, they will be happy to see Trump acting to stimulate demand, for example by cutting incentives to switch to EVs.
Indeed, Trump’s “drill, baby, drill” slogan seems aimed at giving confidence to oil and gas producers, not just in America but in much of the world. It symbolises his intention to remove the regulatory controls and environmental, social and governance investment principles that have constrained the industry in recent years, and his repudiation of efforts to curb climate change.
It is hard to see how those efforts can succeed without a vast global shift to electric power from green sources. Though it is still burning a lot of coal, China’s green energy shift looks, then, like a bet on the future, while the US is betting on the status quo. There may be hard-nosed reasons for Trump’s America to make that choice. But the consequences may be that the US is left on the “wrong” side of history — and the existential battle to contain global warming is dealt a severe blow.
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