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By Liam Denning
Weeks after taking office again, President Donald Trump established the National Energy Dominance Council, proclaiming that “abundant natural resources” would help to, among other things, cool prices, cut the deficit and “end wars across the world.” Some 18 months later, gasoline that costs more than $4 a gallon has stoked inflation, the national debt has topped $40 trillion and the US has started a war several thousand miles across the world.
One might say Trump’s council still has much to prove. More accurate to say would be that energy dominance has degenerated into something more like energy decadence.
US net imports of oil peaked in 2005, but by 2020, a combination of the shale boom and flat demand flipped those to net exports. By then, Trump had already upped the ante from achieving energy independence to gaining dominance. “Near-limitless supplies” of domestic energy would now become tools of economic and diplomatic leverage.
This shift was actually underway already under President Barack Obama, whose willingness to impose sanctions on Iranian oil exports in 2012, despite triple-digit prices for oil in an election year, stemmed in part from rising production elsewhere “including, importantly, here in the United States.” By then, net imports of crude oil had dropped by 3 million barrels a day compared with those when Obama was first elected, a figure higher than Iran’s pre-sanctions exports of 2.5 million a day.
The shale boom’s reversal of declining production of US oil and natural gas thus opened new options for energy diplomacy, just as the prior peak of US oil production and ascendancy of OPEC had imposed constraints four decades earlier. By the time Trump entered office, OPEC had been forced into partnership with Russia to shore up oil prices. White House administrations grew more comfortable imposing sanctions of varying degrees on multiple large oil-producing countries. Trump also picked a trade fight with the biggest source of US oil imports, Canada. This year, he went further and deployed military force against Venezuela and Iran.
It is nearly impossible to imagine such actions if oil supply were tight and the US was still a net importer of a large share of its energy, observes Kevin Book of ClearView Energy Partners, an analysis firm. Earlier this year, some weeks before Operation Epic Fury kicked off, Book had presciently suggested that “long markets could shorten Washington’s fuse.”
Yet while US energy riches offer clear advantages, the resort to military operations does indicate the limits of dominance, with earlier sanctions clearly not having delivered in a world of shadow fleets. The subsequent failure of bombing to achieve a quick, decisive outcome has been followed by the US negotiating for a reopening of the Strait of Hormuz — the status quo ante — and now another round of supposedly harsher sanctions, all punctuated by Trump’s frequent declarations of elusive victory. Being No. 1 in oil production appears to have given the US enough confidence to flex its muscles but not enough capacity to ignore the consequences.
That capacity involves more than just oil production. US refineries, for example, are running harder this summer than in almost any other over the past three decades. Yet that hasn’t prevented fuel shortages arising from the conflict with Iran, along with Ukraine’s attacks on Russian refineries, from pushing up pump prices tethered to global markets.
Another important, and finite, capacity concerns US drivers’ tolerance of high gas prices, especially in service of a war with only 31% approval. An overwhelming majority of Americans, their expectations conditioned by the dominance mantra, think that higher domestic oil and gas output should mean lower energy prices. Having taken the momentous step of risking Hormuz tanker transits, Trump has turned to various emergency measures to shield voters from the fallout, such as draining the already low Strategic Petroleum Reserve further, waiving Jones Act shipping regulations and ending summer gasoline blending requirements early. He has even resorted to accusing oil majors of price gouging.
In contrast to this less-than-masterful display, China has staked a claim to being the real manager of global energy markets this year. Its deployment of clearly large oil stockpiles and reduced demand slashed imports by roughly 5 million barrels a day in June, averting the most apocalyptic oil-price scenarios arising from the closing of Hormuz. Some demand destruction likely stems from an economic slowdown, but some is also strategic: China’s electric vehicle fleet replaced around 1.5 million barrels a day of demand in the second quarter, the International Energy Agency estimates.
The US, meanwhile, seemingly convinced that power grows out of the barrel, has succumbed to a kind of decadence. Trump’s war on EVs fits with a wider disdain for energy conservation in general, thereby forgetting an important lesson from the last Iran-related oil shock. In the five years after Iran’s 1979 revolution, US oil production increased a few hundred thousand barrels a day. What really mattered was the drop in demand of 2.8 million barrels a day, in part because of tighter fuel economy standards. Similarly, the SPR has been allowed to dwindle amid dogged faith in shale, with Congress mandating sales of strategic barrels in a vain attempt to plug yawning fiscal deficits.
The late-imperial vibes extend to the White House seemingly trying to turn Venezuela into some sort of oil-based suzerainty. Perhaps yet more oil reserves under effective US control will usher in true dominance. More likely, it will stoke more of the hubris that has been on ample display already this year.
This column reflects the personal views of the author and does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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COMMENTARY: US Energy Dominance Descends Into Decadence