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How Will TRUMP Recover The Energy Hegemony Of The USA?

Summary

Increasing tension in the Persian Gulf?

Eliminating environmental protection measures?

Increasing tariffs on oil imports?

Indiscriminately subsidizing oil extraction?

Subsidizing investment in drilling new wells?

Regardless of the military actions that the Trump administration may undertake in the Gulf area or other oil-producing countries and the diplomatic pressures it may undertake in those countries to reduce their production, I would now like to analyze possible actions which can be carried out by this administration within its sovereignty protected by the framework of international law, to increase its energy sovereignty.

The first thing that comes to mind is to increase the price of import crude by increasing tariffs.

The amount of the increase in tariff rates should be sufficient for North American E&P to reach their break even.

My crude oil price estimates that would make tight oil wells reach their break even are around $ 70/75 a barrel.

Other more optimistic analysts put that level somewhat lower, around the 60/65 $ barrel.

According to these hypotheses, the increase in tariffs, assuming the current price levels of the barrel (50/55 $) should be maintained, should be between 10 and 20 $ barrel, that is, between 20 and 40%.

This could allow an increase in US oil production, which, however, would be limited by the geological conditions of its deposits that have already reached, or are about to reach, their production peak.

On the other hand, this measure would increase energy prices in the USA, which would represent a negative factor, both for the well-being of US citizenship and for the competitiveness of US exports.

In my opinion, this measure is not, overall, highly recommended for US interests, because of its negative impacts.

The other series of measures consist not in increasing the level of income, but in reducing production costs, via subsidies, or reducing or exonerating taxes or rates, or by reducing the costs that may arise of a relaxation of the measures of protection of the environment.

The Trump administration is likely to opt for the last of the aforementioned alternatives, that of relaxing environmental protection laws, because of its lower or no cost for state coffers, at least in the short term. However, even if you do not want to recognize it, since there is no greater blind than the one who does not want to see, in the medium and long term the costs arising from these measures will be incalculable, not only for US citizens, but for the Humanity as a whole.

We can cover our eyes to the effects of water and air pollution, but their consequences are more evident every day. And they do not progress arithmetically, but geometrically.

Let's hope that environmental movements will be able to cope with such measures if they are adopted by the Trump administration.

Finally, we must analyze the possible incentives to increase crude oil production through subsidies, or reduce or exonerate taxes or duties.

Two are broadly the possible alternatives: reduce or eliminate rates on crude oil production in an amount sufficient to encourage the increase of such production, or subsidize the investment made in the drilling of new wells.

In my view, the second option, to directly subsidize the investment made in the drilling of new wells, is more efficient and less expensive than reducing ad valorem rates or subsidizing indiscriminately the extraction of crude oil.

The direct subsidy on investments in drilling new wells has a specific impact on the increase, or decrease of the decrease, in oil production, and that is why it is the one that would have the greatest effect in the short term and the lower negative consequences would have both welfare of US citizenship and the competitiveness of US exports.

Lastly, it should be pointed out that, most likely, given the different positions of the advisory teams, a more or less successful combination of all the measures mentioned above would be chosen.

We will soon know how accurate the decisions of the TRUMP cabinet are.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.