Trump and energy: Implications for global and Asia-Pacific markets

Picture of Associate Professor Llewelyn Hughes

Associate Professor Llewelyn Hughes

Associate Professor Llewelyn Hughes

Energy policy under a Trump administration and Republican-controlled Congress should have a considerable degree of drive and ambition. Rex Tillerson was quickly confirmed as Secretary of State, along with Ryan Zinke as Secretary of the Interior (DoI) and Scott Pruitt at the Environmental Protection Agency (EPA). Secretary Zinke and Administrator Pruitt favour increasing US production of fossil fuels, and loosening the environmental regulations governing energy production.

Together, these appointments suggest an ambition to markedly increase US production of oil and gas in federal lands and the outer continental shelf, two areas over which the federal government has substantial control, and to boost coal production.

Yet appearances can be deceiving. With Tillerson at its head, ExxonMobil played a clever hand in dealing with contracts with Rosneft, signing a Strategic Cooperation Agreement in 2011. The agreement expanded to include a $15 billion liquefied natural gas (LNG) project on Sakhalin Island in the Far East, targeting Asia-Pacific markets. Yet the effect of the Trump administration policies on Asia-Pacific energy markets is likely to be more of the same, rather than a sharp break from the past.

Trump’s ‘America First Energy Plan’

The Trump administration’s energy plan remains a work in progress. Yet the rhetoric is familiar. The ‘America First Energy Plan’ emphasises ‘energy independence’, long a leitmotif of both Republican and Democratic administrations.

What ‘energy independence’ means, however, is open to interpretation. The Obama administration also emphasised the importance of increasing the domestic production of sources of energy, for example. In doing so it focused its attention on wind and solar photovoltaics, as well as improving energy productivity. Energy independence, for presidential candidate Barack Obama, thus meant reducing oil imports by increasing automotive fuel efficiency standards and developing biofuels, in addition to supporting renewable energy.

The previous Bush administration also touted ‘energy independence’ but promoted an all-of-the-above energy policy, including support for domestic fossil fuel production, along with a range of subsidies for advanced manufacturing in automotives, tax credits for renewable energy and other initiatives.

The Trump administration’s use of the term, in contrast, links it to increased production of fossil fuels. In its ‘America First’ energy plan, the administration states it is "committed to energy policies that lower costs for hardworking Americans and maximise the use of American resources, freeing us from dependence on foreign oil".

The ‘Presidential Executive Order on Promoting Energy Independence and Economic Growth’ signed by President Trump on 28 March 2017 adds more detail to the pre-election promises. It states that "The heads of agencies shall review all existing regulations, orders, guidance documents, policies, and any other similar agency actions (collectively, agency actions) that potentially burden the development or use of domestically produced energy resources, with particular attention to oil, natural gas, coal, and nuclear energy resources". It includes a number of other measures designed to roll back executive orders by the Obama administration targeting climate change-related energy measures.

The Trump agenda is thus distinguished from the previous administration primarily by its hostility to climate change-related energy measures. It also promises to have some effect on domestic environment-related energy policies and on international climate change cooperation, as discussed elsewhere in this report. Its effect on the Asia Pacific, on the other hand, should be muted. The reasons are threefold.

Overly optimistic assessment of potential?

A central claim of the Trump administration is that their proposed changes would enable firms to newly access up to US$50 trillion of oil and gas reserves it states are available in lands owned by the federal government, and elsewhere. If there were indeed such an enormous amount of energy sources ready to be exploited, this could have a significant effect on global commodity prices. Yet it is unclear how this number was calculated, including what the relevant time period is in which this vast amount of value would be unlocked. It is also unclear how many natural resources will ultimately prove recoverable from federal lands and the outer continental shelf given technology, water and other constraints, oil and natural gas prices, and the likely public controversy associated with producing large amounts of unconventional oil and gas across these areas. Driving more production of natural gas would also only serve to lower prices, which would reduce the incentive to invest in further production.

This is also the case with coal. The executive order issued by President Trump targets the Clean Coal Plan of the Obama administration. Yet at its root the challenge coal faces in power generation in the United States comes from the enormous growth in natural gas production, rather than any regulatory change on behalf of the federal government. Given the age of the United States coal fleet, long construction times and the expectation that plants will continue to operate over decades, the coal-friendliness of the current administration is unlikely to be enough to overcome investment risks relative to natural gas-fired power, or indeed renewable energy such as wind and solar photovoltaics.

Influential policies already passed

A second reason Trump’s energy policies will have less effect on the Asia Pacific than expected is that major legal and regulatory constraints on the flows of US oil and gas production were removed under the Obama administration. There is much the new administration can potentially do to reduce environmental regulations governing oil, gas and coal production. The burden of any such changes will mainly fall on US citizens, however.

Beyond this, the reversal of the long-standing ban on oil exports – petroleum product exports have been permitted – has real potential to influence oil markets in the Asia Pacific, Europe and elsewhere. More generally, the rise in United States production implies a fall in the price-setting power of Saudi Arabia and the Organization of Petroleum Exporting Countries (OPEC), one that is particularly difficult for the latter to resolve because United States oil is produced by thousands of companies, rather than state-owned oil companies that are prevalent in many oil producing countries.

The change in oil export settings was already implemented by the Obama administration, however, with refiners in both Europe and the Asia Pacific reported as accepting cargoes. There is thus little for the Trump administration to do here, beyond what was implemented under the previous presidency.

The same holds for trade in natural gas. Markets for natural gas have historically been far more regionalised than oil because of the need to condense it to liquid form before transportation by ship. This has also meant prices have been only weakly integrated between regional markets, with consumers in the Asia Pacific recently paying significantly higher prices than in the United States.

The rise of natural gas production in the United States presents an opportunity to link the US and Asia-Pacific gas markets more closely. Key here is the regulatory process managed by the Federal Energy Regulatory Commission (FERC), enabling the infrastructure to be built that will enable natural gas cargoes to be exported. Certainly, an export-focused energy policy enabling greater natural gas exports would have made sense to the mercantilist impulses of the new administration. Yet here once again, the licensing of LNG export terminals began in earnest prior to the current administration. The long lead times required to complete construction of liquefaction facilities make it unlikely that a more rapid process would cause a steep change in the volume of gas flowing into Asia-Pacific markets.

Institutional constraints on President

The third factor that reduces the large effect of Trump’s energy policies on the Asia Pacific is the limited power of the presidency itself. The United States' political institutions incorporate a sharp separation of the executive and legislative branches, and party discipline is imperfectly imposed on congressional members, as already seen with the failed attempt to pass changes to healthcare legislation. It is also the Congress, rather than the president, that controls the budgetary process. There certainly appears to be some agreement among the Republican congressional delegation over climate change policies, and this may lead to the rescinding of budgetary support for renewable energy. As with the Obama administration’s Clean Coal Plan, however, legal challenges will ensure the implementation of changes proposed by the Trump administration will be incremental rather than revolutionary.

For the Asia Pacific, one effect of this change is likely to be reducing the competitiveness of US firms in the markets for new energy technologies focused on climate change. Prodded by United States automakers, the Trump administration, has already ordered a review of the corporate fuel efficiency standards established by the Obama administration for example, and the review is widely expected to seek to reduce their stringency. Yet this will not reduce the increasing competitiveness of electric vehicle technologies, and presents a business opportunity to Japanese and European auto manufacturers in this key new technology.

The unknown unknown of energy security

The unknown unknown in asking how the Trump administration’s energy policies will affect Asia-Pacific energy markets lies in its approach to foreign policy. Here the administration’s approach to Iran matters. The integration of oil markets globally means oil supply interruptions are experienced as price phenomena, rather than losses of physical supply. A tightening of economic sanctions against Iran that reduces the access of Iranian oil to global markets could thus exert short-term upwards pressure on oil prices, and by extension natural gas prices in the Asia Pacific because of the link between oil and gas prices in many Asia-Pacific natural gas contracts. The new administration has also signalled that it will adopt a less conciliatory position towards North Korea, and geopolitical risk will push energy prices higher, other things being equal. Regardless of rhetoric, however, over-optimism, the fact that many big policy challenges have already been overcome and institutional features of the US presidential system mean incrementalism is most likely be the hallmark of the Trump administration’s implications for Asia-Pacific energy markets.

Updated:  24 April, 2017/Responsible Officer:  Dean, ANU College of Asia & the Pacific/Page Contact:  CAP Web Team