COLUMN-Trump's empty threat to stop buying Saudi oil: Kemp

(John Kemp is a Reuters market analyst. The views expressed are
his own)

By John Kemp

Nov 16 President-elect Donald Trump is
very unlikely to restrict imports of crude oil from Saudi Arabia
despite threats to do so issued during the election campaign.

Trump is first and foremost a showman and impresario rather
than a policy wonk. Much of what he said on the campaign trail
was intended to mobilise support rather than provide a detailed
programme for government.

The media “never takes (Trump) seriously but it always takes
him literally. I think a lot of voters who vote for Trump take
Trump seriously but not literally,” as technology billionaire
Peter Thiel observed in October.

The prospect of an import ban on Saudi crude is one of those
things he said that should not be taken seriously but was meant
to galvanise support from oil workers hit by the downturn.

COMPENSATION DEMAND

Trump warned that he would be prepared to stop buying oil
from Saudi Arabia unless the kingdom provided ground troops to
fight Islamic State.

He also insisted the kingdom and other Gulf oil producers
should compensate the United States for the enormous cost of
providing them with military protection.

In fact he seemed preoccupied by compensation for U.S.
military protection rather than ground troops.

“We are not being reimbursed for the our protection of many
of the countries … including Saudi Arabia,” Trump complained
in an interview (“Donald Trump expounds his foreign policy
views”, New York Times, March 26).

“We protect countries, and take tremendous monetary hits
protecting countries,” Trump said. “We lose, monetarily,
everywhere. And yet, without us, Saudi Arabia wouldn’t exist for
very long.”

Trump said the United States “desperately needed” oil from
the Gulf a few years ago but now was on the verge of achieving
energy independence thanks to the shale revolution.

The United States had found oil in places “we never thought
had oil” with the result there is a glut with “ships out at sea
that are loaded up and they don’t even know where to dump it”.

“They’re closing wells all over the place,” Trump said,
presumably referring to marginally economic U.S. oil and gas
wells being shut in owing to the slump in prices.

Trump has been supported by Continental Resources
Chief Executive Harold Hamm, who acted as one of the campaign’s
principal advisers and has been tipped as a possible choice as
energy secretary.

Hamm has in turn been critical about Saudi Arabia’s and
OPEC’s role in the 1973 oil embargo and an evangelist for
developing domestic oil and gas resources to provide energy
independence (“How a North Dakota oil billionaire is helping
shape Trump’s views on energy”, Washington Post, June 6).

CARTEL, DUMPER OR BOTH?

The United States has always had a complicated relationship
with Saudi Arabia and other members of the Organization of the
Petroleum Exporting Countries.

The complexity stems from the fact that United States is
simultaneously one of the world’s largest oil producers as well
as its largest consumer and a large net importer.

At times, U.S. policymakers have accused OPEC of being a
cartel which has sought to keep prices artificially high to the
detriment of U.S. motorists and other consumers.

But at other times the United States has accused Saudi
Arabia and other OPEC members of flooding the market, dumping
oil, and predatory pricing designed to put U.S. oil producers
out of business.

The foundation of OPEC in 1960 was strongly criticised by
the U.S. media for “interference with the principle of free
enterprise” and the formation of an “international cartel”.

Public hostility towards OPEC intensified following the Arab
oil embargo in 1973/74 and the steep increases in the price of
crude during the rest of the 1970s.

But OPEC was also criticised for flooding the global market
during the price crisis of 1985/86 which resulted in widespread
bankruptcies in oil-producing areas of the United States.

Vice-President George H W Bush was even sent to Riyadh to
plead with Saudi Arabia to push up prices to save Texas
producers.

More recently, OPEC has been blamed by some in the U.S. oil
industry for price slumps in 1998/99 and again since 2014,
provoking a new round of complaints about predatory pricing.

U.S. OIL INDEPENDENTS

Saudi Arabia and other OPEC members have always had a
particularly fraught relationship with small and medium-sized
“independent” oil producers of the United States.

U.S. independent oil producers have always been among the
most vulnerable to price swings and therefore the most closely
concerned with OPEC.

The major international oil companies have integrated
operations which means they produce some oil within the United
States but also import foreign crude to feed their refineries.

The integrated companies have always been strong supporters
of free trade in both crude and refined products since it allows
them to optimise their refinery production (“Oil, gas and
government,” Bradley, 1996).

But the independent oil producers have often favoured
protectionist policies to blunt competition from cheap imported
crudes.

During the 1950s and 1960s, rising production from the
supergiant oilfields of the Middle East squeezed U.S.
independents particularly hard.

The independents fought to restrict the amount of foreign
crude that could be imported into the United States (“Energy
policy in America since 1945”, Vietor, 1984).

Pressure from the independents resulted in the introduction
of quotas under the voluntary oil import program which became
the mandatory oil import program in 1959 and lasted until 1973.

The Texas Independent Producers and Royalty Owners
Association (TIPRO) openly supported the creation of OPEC in
1960 in the hope it would restrict foreign oil production and
imports (“OPEC: the inside history”, Terzian, 1985).

But as Middle East producers added millions of barrels per
day of extra output in the 1960s, the Texas Railroad Commission
imposed increasingly tough restrictions on domestic producers in
a bid to stabilise prices.

U.S. independent producers were therefore big beneficiaries
of the oil shocks of the 1970s and again from the rise in oil
prices between 2004 and 2014.

But they have been at the forefront of complaints about
dumping and predatory pricing by OPEC during the busts of the
mid-1980s and again in the 1990s and since 2014.

U.S. oil producers have complained bitterly that foreign
crude imports have continued and even increased since 2014 even
as domestic oil drilling and output have fallen.

TRUMP’S OIL POLICY?

Given that independent oil and gas producers have been among
Trump’s strongest supporters and advisers on energy issues, it
is no surprise that his campaign views reflect their perspective
and concerns.

Like most other aspects of Trump’s programme, the details of
his energy policy have yet to be worked out.

But a future Trump administration is very unlikely to try to
restrict oil imports for practical as well as political reasons.

The markets for crude and refined fuels are fundamentally
global so it makes no sense to talk about achieving energy
independence.

The United States has never relied on crude from the Middle
East but its partners in Europe and Asia have been much bigger
importers.

And the law of one price ensures that oil price shocks in
Europe and Asia affect consumers in the United States.

Furthermore, the United States remains far from
self-sufficient in crude. Even at the height of shale drilling
boom, the country still needed to import more than 7 million
barrels a day of crude to feed its refineries (tmsnrt.rs/2fYs2Kl).

Most refineries require a blend of light and heavy crudes to
operate efficiently. While domestic shale oil is mostly very
light, imported foreign crudes, especially from Saudi Arabia,
are heavier, and needed for blending.

If a Trump administration banned oil imports from Saudi
Arabia, the shortfall of medium and heavy crudes would have to
come from other producers: Iraq? Iran? Russia? Venezuela?

The major oil companies, including Exxon and Chevron, which
have significant political influence, will resist any efforts to
restrict the choice of crudes available for their refineries.

Independent refiners, many of which are also politically
connected, will also fiercely oppose any measures that restrict
their crude selection and drive up input costs.

The United States cannot easily discriminate against imports
from Saudi Arabia because both countries are members of the
World Trade Organization and bound to extend each other
most-favoured-nation treatment.

Thanks to the shale revolution, the United States has
emerged as a major exporter of refined products including
gasoline and distillate, so it has a strong interest in
upholding free trade in oil and fuels.

Independent producers, led by Hamm’s own Continental,
lobbied hard for Congress to lift the ban on domestic crude
exports, citing the importance of free trade, so it would be
inconsistent to ban imports.

Finally, the mandatory oil import programme was an
administrative nightmare which failed to work properly and
spawned a huge number of distortions, and no one wants to repeat
that unhappy experience.

(Editing by David Evans)

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