Donald Trump’s victory in the election this week could spell trouble for OPEC. The oil cartel is gearing up for its semiannual meeting in Vienna later this month where it is expected to finalize the details of a tentative agreement to cut its collective production by roughly 800,000 barrels per day. This deal, if it ever materializes (a big if) would help to reduce the oversupply that has kept crude prices down in recent months and years, or so the thinking goes.
But waiting in the wings are American shale producers, many of whom which are sitting on idled and recently unprofitable wells, eagerly awaiting a price rebound to restart production. Trump has promised to reduce the regulatory burden on these companies and open up more federal land to drilling, two moves that in theory could make the coming shale rebound even more powerful. The FT reports:
[C]ombining an Opec-manufactured price rise with a sudden burst of legislative cost-cutting in the new year, through lower taxes or regulatory expenses, could see US shale bounce back faster than the cartel first thought.
If the nimble US shale producers were to be too successful there’s little to stop the price sliding back down again, with record inventories of crude having backed-up in storage globally. Opec would have given up market share and revenues for nothing.
There are, however, limits to Trump’s ability to affect American oil and gas production. To be sure, oil lobbyists are salivating at the thought of what they expect will be a more fracking-friendly administration, but it’s worth noting that President Obama has already created a regulatory atmosphere that has allowed the shale revolution to thrive. And, as the FT explains, opening up federal land to more fracking won’t mean an immediate increase in American oil output:
[Donald Trump’s] promise to slash regulation of the energy industry and throw open federal lands to drilling would be unlikely in the short term to achieve much on its own…US energy companies are not sitting on hundreds of thousands of acres of undrilled land because of regulation but because it is currently unprofitable. Their bankers, who have done so much to keep them alive during the downturn, would balk at the prospect of funding an unfettered drilling spree in untested lands.
That said, the threat of an American shale recovery will still weigh heavily on the minds of the leaders of OPEC’s various petrostates. There is a strong possibility that if the cartel cuts production (and ceding market share) to prod prices up, U.S. companies would be the first take advantage of that rebound by quickly upping their output, and in so doing would keep the market well- or even over-supplied, effectively limiting the impact of OPEC’s cuts. That’s the worst-case scenario, and we could be just months away from it becoming a reality.