Never underestimate the power of a Donald Trump tweet.
In late April, when oil was rising fast, taking gasoline prices up with it, Mr. Trump slammed OPEC for prices he deemed “artificially very high.” This week, he took another whack at the cartel: “Oil prices are too high. OPEC is at it again. Not good!”
Certainly not good for a President whose Republican party faces mid-term congressional elections in November. Almost every American household owns one or two cars, and an obscene number of them are gas-slurping SUVs. When prices approach US$3 a gallon, American drivers tend to get surly and look for someone to blame. At US$4 – the price reached just ahead of the 2008 financial crisis and subsequent deep recession – they might burn down the White House.
Charles Schumer is already using high gas prices for political gain. In late May, the leader of the Senate Democrats used a price sign at an Exxon station – US$3.09 for regular – as a backdrop as he blamed Mr. Trump himself for the costly fuel. He linked the price rise to Mr. Trump’s decision to revive sanctions against Iran, one of OPEC’s top oil producers and exporters, and he was partly right.
The Trump tweets appear to have worked their magic. Since peaking at US$80 in May, Brent crude, the international benchmark, has dropped US$5 and the losing streak continued on Friday, with a decline of nearly 2 per cent. Still, the price is up 60 per cent in a year, but the falling price might be enough to keep American gas prices below the psychologically repellent US$3 level (the AAA says the national average for regular gas at the end of the week was US$2.90).
A lot of hedge funds and other investors who went long on oil, expecting it to hit US$90 or more, got burned. (A month ago, Bank of America Merrill Lynch predicted that oil would reach US$100 next year.) Olivier Jakob, of Switzerland’s PetroMatrix oil consultancy, seemed to have bet right in early May when he said the United States would not tolerate gas prices above US$3 “and that Saudi Arabia would be kindly asked by the White House to increase production.”
Oil is the most political of commodities, routinely making a mockery of price forecasts; the raw economics of supply and demand often do not apply. But rarely has oil been as politically charged as it is under the Trump administration. Mr. Trump did not rely exclusively on traditional backroom lobbying to try to get the Saudis, who are the dominant players in the OPEC cartel, to shift their output. He did it in public, through his tweets, for all voters to see, and it worked.
Saudi Arabia, along with Russia – which is not an OPEC member but has been acting in unison with the cartel – have been lifting exports. International Oil Daily reported that Saudi exports rose 100,000 barrels a day in May over April. They are probably still rising, as the White House puts pressure on OPEC to cover falling production in crisis-stricken Venezuela and the inevitable export decline in Iran, once the new sanctions hit.
What a turnaround. In recent months, the Saudis had been giving the impression that they were in charge of the global oil show. As Mr. Jakob noted, the Saudis would openly discuss with the hedge funds on how they would support oil prices. It was certainly in their best interests to keep prices high, though not super high, to help ensure the success of the initial public offering of Saudi Aramaco, the world’s biggest oil company, when it hits the stock market in the next year or so. The Saudis also needed rising prices to fill their budget hole and finance Crown Prince Mohammed Bin Salman’s Vision 2030 project, which seeks to overhaul the sclerotic economy and create an entrepreneurial class.
Mr. Trump seems to have wrecked any notion that the Saudis are in charge of the oil game. He is evidently calling in his chits. The Saudis, along with the Israelis, sought Mr. Trump’s help to box in Iran, the Saudis’ great rival in the Middle East power struggle. The Saudis lobbied hard for the Americans to withdraw from the Iranian nuclear deal and crank up the sanctions. That’s exactly what happened, and now it’s payback time. Mr. Trump doesn’t do freebies.
Over the medium to long term, rising global demand for oil will probably ensure that the era of US$50 oil is gone forever. We might be decades from peak oil. The electric-car market is still tiny and no one has figured out how to run passenger jets and freight ships on batteries.
In the short term, oil traders and investors who assume that the recent price fall is the perfect setup for a quick price bounce-back might look like chumps. With Mr. Trump in the White House, what’s driving the price is the buddy system between him and the Saudi regime. Play the tweet, not the market.