Brent Oil Attempts Rebound in Volatile Trade After Prices Touch 21-Year Low

Global oil prices have been racing higher and lower for most of the past decade, and for the most part they have remained virtually zero. The decline has been mostly because oil supplies have been soaring, as new technology and oil-by-rail shipping have opened up production in places like Canada, Russia, and North Dakota.

That means that there’s plenty of oil around, meaning that prices will be very volatile when they do come down.

The reason is that any oil producer — even those with cheap (or cheap to the free market) oil, as Saudi Arabia has — is acutely sensitive to oil prices. If they drop and stay down, they’ll face huge budget deficits, and their economic welfare will decline. And if oil prices go up, as they have for most of the past decade, they’ll make big profits. The more they buy, the more money they have to spend on lobbying and other political spending.

In both cases, the government is a big part of the problem, and can’t help much by simply keeping prices artificially high — other than by meddling in natural market mechanisms for “fixing” prices when oil goes up.

After falling relentlessly for much of the past decade, oil prices have started to go back up again, and now the White House is looking to be more proactive. Over at Newsweek, Kristin DeUngr wrote that there was “growing worry in Washington” that President Trump “will crack down on oil prices.” One source of that concern was an Associated Press report that Trump told an Arab leader that he would stop Saudi Arabia from using oil as a weapon.

On a number of occasions, the Trump administration has denied that Saudi Arabia, and to a lesser extent the UAE, would influence oil prices in a way that harms the United States. That’s what was evident when the administration was caught up in a fake-news scandal last fall over whether Saudi Crown Prince Mohammed bin Salman ordered the murder of a journalist. But that should not erase the fact that, in recent years, some of the wealthiest people in the world have been pouring tens of billions of dollars into lobbying to try to stymie Trump’s efforts to rein in Saudi Arabia’s power.

There’s no hard evidence that Trump will move against Saudi Arabia, but for the moment there’s every reason to think he will. And when he does, there’s every reason to expect price volatility in the oil markets to shoot back up.

If Trump holds tight to sanctions on Iran, prices may drop back down to earth; but if he gets more aggressive and institutes import limits, they could go way up. Or there’s the other possibility, that Trump will raise taxes on oil imports and use that money to buy lower prices by imposing some sort of long-term limit on global production growth.

Most likely, there won’t be much money flowing to the energy sector. So, since the Trump administration isn’t going to be able to balance the budget on oil prices alone, it’s going to have to add subsidies to the tax code. But as with Trump’s massive tax cut, that won’t do much — prices are likely to be about the same as they would have been before, but more vulnerable to mismanagement.

A lot of people in the oil industry have good reasons to oppose big subsidies, and Trump isn’t very popular, at least among swing voters, so they may give him a relatively small boost. And that could even help Trump with Democrats. But history suggests that it will be short-lived. Eventually, supply-side policies will backfire and put a premium on that part of Trump’s agenda that he likes the least.

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