Trump Gas

A curious thing happened on the way to the gas pump recently.  A friend of mine messaged me this:

Still missing my Trump gas!  I'm sure Biden gas gets better mileage. 

This is not the first time my pal has voiced this lamentation and fondness for low-price Trump Gas.  Between you and me I think he's twisting my tail.  Giving me a friendly poke and trying to get a rise out of me.  I'm not a Biden guy.  And I was never a Trumper so I'm not gonna take the bait.  But I understand my buddy's sentiment.  We went on a marathon road trip a couple of months ago.  In this order, lodging and gas were the principle expenditures.  We burn only non-ethanol premium grade gasoline in all of our small engines and a trip to town to refill four gas cans set me back $80.  Heck.  Even I like Trump Gas.  But I digress.  

As a recovering financial guy I am both bemused and chagrined from time-to-time by magical wishful economic thinking that seems to find a home on social media; particularly as it relates to the subject of rising gasoline prices. I have FB friends, a minority of which, believe that If only Donald Trump were in the White House a gallon of gasoline would set you back $2.25, give or take.  I'm not making this up.  It is like an article of faith.

If we go back only a few years the price of crude oil and gasoline tanked in early spring of 2020 as the impact of the pandemic laid waste to the global economy AND PEOPLE STOPPED TRAVELING.  Before the Covid crisis 100 million barrels of oil each day fueled global commerce.  As demand fell off of a cliff that dropped by more than 35 percent. Price followed.

Leading up to this was the Saudi-Russian crude oil price war that began a month earlier on March 6, 2020.  Without knowing it in the moment the decision of these OPEC members to blow the lid-off production levels couldn't have come at a worse time.  It was ominously prescient as a novel virus from Wuhan Province had already quietly infiltrated the world population.

Meanwhile, never one to shrink from taking credit where he didn't earn it, Donald Trump had been boasting that he was giving all Americans a tax break with lower oil prices.  In fairness, this is what Trump does.  Cheap Trump Gas = more money in your pocket!  No disagreement from me but sometimes you need to beware of getting ahead of your skis.

For the energy sector all of the elements for a perfect storm were now in place.

In April 2020 the oversupply of oil led to an unprecedented collapse of oil prices forcing the contract futures price for West Texas Intermediate crude (WTI) to plummet from $18 a barrel to around -$37 a barrel.  

Yes, minus $37.  Prices went negative for a brief period of time.

As the coronavirus recession took hold the oil markets imploded from the Saudi-Russian surge on the supply side and the bottom falling-out of the demand side.  American oil companies were furloughing petroleum engineers at a record pace and thousands of additional jobs were being eliminated.  Facing the worse economic downturn in more than a generation even wells were abandoned.  

While consumers were enjoying savings at the pump with Trump Gas - oil patch states like Texas, North Dakota, New Mexico, Oklahoma, Colorado and Alaska  were staring down a calamity of ginormous job losses along with associated tax revenues.  Faced with a re-election campaign, a teetering economy and a perfectly nasty collapse of the domestic oil industry President Trump made the decision to enter the fray and pull his bacon out of the fire with some sort of deal. 

Trump's deal was for OPEC to scale-back their production that year.  This afforded domestic oil producers some welcome breathing space preventing a wholesale collapse of the industry. 

Here we are today. 

It seems like forever (to me at least) since the shit hit the fan.  A pandemic, a deep self-inflicted recession, bad decisions, an election, vaccines, a recovery, hindsight and a population's desire for a return to normalcy while learning to coexist with viral variants.  Not so surprisingly, US crude production has largely returned to pre-pandemic levels.  We remain a net exporter of crude oil to the world.  What has not changed is OPEC production.    

You don't have to take my word for any of this as there is a terrific summary here at Fortune .com that lays it all out for you. 

Donald Trump's deal got OPEC to slash production.  And for the present, that deal remains in place insofar as OPEC production of crude.  A recovering world economy has brought demand back to pre-Covid levels.  And as a consequence of rising demand; absent a growth in supply, prices have risen.  That is what happens in supply demand markets.  OPEC members are reaping record profits.  Can you blame them?

The war in Ukraine has rattled the world oil market causing global prices for crude to soar further complicating and compounding the situation.

I can appreciate consumer frustrations over soaring energy prices and the desire for simple explanations.  If you are a die-hard Trumper Biden is responsible for this.  Inexplicably, he did it deliberately.  The reality is more nuanced.   

Increased Demand + Restricted Supply = Increased Prices 

Some of you aren't going to like reading this but OPEC continues to hold-up their end of the  Trump-negotiated deal. 

There's probably a wee bit of price gouging going-on.  You read it here first you say?  Ha Ha.  It happens.  Although you'd be hard-pressed to locate an oil company executive willing to admit to it.  Domestic energy producers and refiners are reaping record profits.  Can you blame them?  

Given the market conditions in the spring of 2020 my advice would have been to buy on the dip and in particular to increase positions in struggling energy sector shares.  But what do I know?  I'm just a recovering financial guy.

In current news, on Thursday of last week, following furious lobbying on the part of the administration, the group of oil-producing states known as OPEC+ (13 countries that are members of the Organization of the Petroleum Exporting Countries plus 10 non-OPEC countries) agreed to boost production by 648,000 barrels a day beginning in July and again in August.  This may seem like a big deal but I'm here to tell you it's lip service.  I could be wrong but I don't believe it will have any meaningful impact on the retail price of gasoline.

During the election campaign Candidate Biden vowed to turn Saudi Arabia into a "pariah state" as a consequence of the grisly murder of Jamal Khashoggi.  Of course, this was long before rising fuel prices became a contributing factor to soaring inflation and Democratic chances in the midterm elections.

The Saudis are not our friends; nevertheless, President Biden will be paying Mohammed bin Salman a call to smooth things-over.  I wonder if anyone is going to say "pariah" out loud.

In conclusion, we can debate government policy and the impact it has on energy markets all day long.  Everything in the paragraphs above covers a period only slightly longer than a couple of years.  That is very short term in the economic world thereby amplifying the roller coaster effect.  In the financial world I learned that most consumers focus only on the roller coaster ride and sometimes you have to talk them off the ledge.  For the more thoughtful of my readers we need to bridge the over-simplified notion of magic Trump Gas.  A more impactful debate might be the veracity of government intervention in the markets, how loose monetary policy is a primary contributor to inflation, shutdowns, bailouts, handouts, politicizing public health, stimulus and other crazy-ass meddling.  That could take all month long.

Stay-tuned......