Corporate Debt Review

When Campaign Promises Collide with Market Realities

Is That An Order?

Presidents certainly have the right to structure administrations as they see fit. Yet there is a counsel that should be heard on this.

Years ago I said in an interview that the devices most successful in securing an electoral path to the White House are usually the worst upon which to base American foreign policy.

Such a montage is playing out these days in a big way.

We are in the midst of executive moves in Washington that primarily seek to push forward an agenda which originated on the election campaign trail. Many of the actions lack specifics and will have little immediate effect. Yet some of them have already changed the energy landscape moving forward.

Last week, the newly inaugurated U.S. President continued issuing a flurry of contentious executive memoranda and orders. There has been much confusion on what force such actions have.

An Executive Order (EO) is a presidential directive to a particular part of the executive branch containing specific instructions and carrying the force of law. The scope of such instructions must still be allowed under previously passed Congressional legislation.

An Executive Memorandum (EM) is intended to manage actions, practices, and policies of the various departments and agencies in the executive branch. These tend to provide basic direction but are much broader in application (and often interpretation) than Executive Orders.

Only three of the broad topic ranges addressed thus far have an apparent upfront impact on the energy markets: the expediting of the Keystone XL and Dakota Access pipelines; a move to prioritize U.S. materials in pipelines generally; and the relaxation of environmental review for new projects vital to national infrastructure. The former two are EM; the last an EO (but very general in guidance).

The others are in immigration (EO), foreign trade (EM), wall on the Mexican border (EO), regulatory reductions, military readiness, blocking abortion subsidies abroad (the so-called “Mexico City Policy”; EM), reorganizing the National Security Council (NSC; EM), and of course, several continuing a relentless drum beat against Obamacare (both EO and EM).

These latter items are generally considered to have less direct influence on energy. On closer inspection, however, that is hardly the case in several instances.

Not So XL-Ent

First, even the three executive actions relating to energy will have little substantive result. XL and Dakota will help producers in the Bakken, Williston, or Three Forks basins of North Dakota and Montana move volume. Yet, the net advantage is questionable.

The situation is quite different from what existed almost seven years ago when XL was first commissioned. Then, the assumption held that a greater reliance on North American-based production was essential to offset increasing reliance on imports from elsewhere.

Yet the reality is now one in which domestically produced shale and tight oil comprises both extracted volume and reserves much above anybody’s expectations when the pipeline debate began. Put simply, discounted heavy oil from Canada’s Athabasca oil sands just isn’t needed to offset concerns south of the border.

In fact, the increasing flow from Canada will be merely the latest impediment to American producers trying to hold their heads above water. Additionally, the cost differential remains well below any level allowing a re-export of Canadian crude from the U.S. to foreign markets. Congress may have allowed crude export after a more than forty-year prohibition, but it will take some time (and a more robust market price) before any significant export occurs.

Little of this will involve the heavy oil from Canada. Any ability to export this at a profit will come from Canada directly, not pass through from the U.S., and it is likely to require government subsidy.

Then there is the employment argument. Proponents assert that XL will provide about 42,000 jobs during the construction phase. When completed, however, the total number of permanent new jobs will shrink to no more than 39 – spread over six states. That is likely to be dwarfed by the lost employment from moving less crude south by rail.

As such, the market impact of XL is likely to be negative with more U.S. companies succumbing to the competition and reduced net jobs resulting from the shift in the export process itself.

Meanwhile, the executive order requiring American pipe for pipeline systems inside the country is touted as a way of improving the domestic tubular industry. Unfortunately, it will increase the overall cost of pipelines, all of which will be passed downstream to end users (refineries in the first instance, retail consumers in the second via the price of resulting oil products).

My preliminary estimate is the move (if enforced) will add about 17% to the final cost of XL. Given that Dakota Access is already 90% completed (largely with Canadian and other foreign steel by the way), the effect there will be less.

Overall, requiring only U.S. pipe relieves metal producers from any competitive pressures and will guarantee that costs remain higher.

When it comes to the relaxation of environmental regulations, the devil is in the still-to-be-determined details. In a broad view, the Trump Administration has already signaled a preference for business development over environmental concerns.

There are certainly some regulations that can be eased without adversely impacting either business or stewardship to nature. But if the main focus is on the bottom line, the cost of environmental damage will begin adding up.

Other Executive Measures Will Drive Energy Prices Higher

Yet the energy sector impact is hardly limited to these categories. One of the most acute mindset failures of the new administration is its refusal to accept that energy prices are determined globally, not locally. The politically-fueled decision to take vantage only from the end of the energy chain has already set in motion some disturbing results further up the process with sources and elements determining the actual cost/price distribution.

These remain global.

And it is here that some of the fallout from other executive pronouncements are rolling out their own problems.

Take the Mexican wall, for example. Forget for a moment the major problem it causes for U.S. manufacturers from what is certain to become a trade war, the employment lost to Americans resulting from constrictions on exports, and even the imbalance emerging quickly in financial exchanges. This one has a further problem just lurking in the shadows.

The so-called “Brownsville loop,” in which Mexican crude has evaded import charges at the Texas border has been paralleled in both cross-border natural gas and electricity. This will go despite its remaining a main staple of the economy on both sides of the border.

In contrast, the wall will be funded by a tariff on goods coming into the U.S. from Mexico. Unless he exacts some “Mexican payment,” Trump will have failed in his most visible campaign pledge.

What is likely to come, and be applied in a much broader agenda, will have a much more pronounced result. Usually called the “border adjustment tax,” it is a device intended to make imports more expensive. This also just happens to be a cornerstone of the corporate tax overhaul advanced by the White House.

In the case of energy, the idea is to tax imports mainly of oil, natural gas (the trade here with Mexico is intensifying), and liquefied natural gas (LNG). U.S. exports would not be affected, although they would probably be subject to similar tariffs from other countries.

Forget for our current purposes any obvious parallels with what protectionist policies did in advance of the Great Depression. “Fortress America” didn’t work then and it won’t work today. The immediate problem is more apparent. The process will allow domestic U.S. energy production to rise to the “tax adjusted” cost of imports.

Good for selected U.S. producers, but not so hot for U.S. consumers. The level of oil imports are currently determined by cost considerations at refineries, with the bulk of those imports usually contributing to restraining the price consumer pay at the pump.

That “import advantage” is on its way out.

Then there is the immigration ban, an order that in the last 72 hours has received an avalanche of media attention. The energy impact here is already playing out. Iran (one of the seven nations on Trump’s list) has reciprocated by announcing it will deny visas to U.S. citizens, and as of this writing it appears that fellow list-member Iraq will respond similarly. The associated uncertainty has revised my Parris energy meetings’ agendas beginning this week and my sessions with the Iranians in Frankfurt starting on February 13.

It also apparently scuttles my attendance at the Iranian Oil Summit in Tehran in less than three months.

Yet, the effect on energy has more to do with collateral matters than it does on who gets to enter the U.S. or who is refused travel elsewhere. In a global energy sector, Trump is turning the U.S. provincial.

Policies often have consequences quite apart from initial intent. And one has already emerged from this EO. Widely perceived in the Islamic world as an attack on Muslims, the immigration ban runs the risk of marginalizing American interests in the Mideast and North Africa, as well as OPEC.

My sources are indicating officials in places like Riyadh, Baghdad, and Amman are livid. The move was made without consulting our supposed Saudi, Iraqi, and Jordanian allies beforehand.  In the case of Iraq, it ended up being one of the seven nations listed despite the billions of U.S. dollars and thousands of U.S. lives expended there.

Additional energy repercussions are coming from executive actions initiating the process of pulling the U.S. out of the Trans Pacific Partnership – thereby creating problems for American companies partaking in the dominant energy market for the next three decades – and a major reorganization of the NSC.

The latter is particularly disquieting. It removes participation of the Joint Chiefs of Staff chairman and the Director of National Intelligence from participation in principals’ committee activity unless the issue has a direct bearing on their focus areas.

On the other hand, for the first time since the NSC was formed in 1948, a political appointee – Trump’s chief strategist (and former head of ultraconservative Breitbart News) Stephen Bannon – has been added to that top level national security planning committee.

The move is another indication that Trump seeks to lessen the influence in his administration of both military brass and intelligence heads. It telegraphs an approach that is not going down well in other parts of the world.

As a former intelligence officer, I also find this troubling. As I can personally testify, national security issues arising from geopolitical events impacting the energy sector are routinely brought to the NSC staff through the two agencies now being discounted in the reshuffle.

This is playing with fire merely to control a political agenda.

 

About the Author

KentMoors

Dr. Kent Moors is an internationally recognized expert in oil and natural gas policy, risk management, emerging market economic development, and market risk assessment.

He serves as an advisor to the highest levels of 27 countries, including the U.S., Russian, Kazakh, Chinese, Iraqi, and Kurdish governments, to the governors of several U.S. states, and to the premiers of two Canadian provinces. He’s served as a consultant to private companies, financial institutions and law firms in 29 countries, and has appeared more than 2,300 times as a featured radio-and-television commentator. He appears regularly on ABC, BBC, Bloomberg TV, CBS, CNBC, CNN, NBC, Russian RTV, and the Fox Business Network.

A prolific writer and lecturer, his six books, more than 2,700 professional and market publications, and over 650 private/public sector presentations and workshops have appeared in 47 countries.