Trump Tweets And Oil Drops. Is That Really Good For The Economy? - Forbes

Oil markets fell today, with WTI down more than 3% at noon. This was a reaction to President Trump's early morning tweet about oil prices rising too high.

AP Photo/Jacquelyn Martin, File

Oil prices getting too high. OPEC, please relax and take it easy. World cannot take a price hike - fragile!

— Donald J. Trump (@realDonaldTrump) February 25, 2019

Before the President's tweet, oil prices had been rising steadily since January, though both Brent and WTI were still well below their 2018 highs. Falling OPEC production has definitely contributed to rising oil prices, but a good percentage of the increase is due to U.S. sanctions on two OPEC countries: Venezuela and Iran. The other significant component is a drop in OPEC production coming from Saudi Arabia, which cut production in February and plans additional production cuts in March to deal with regular maintenance and technical issues in one of its fields.

Is it even possible for OPEC to "relax and take it easy," as President Trump's tweet politely asks?

Saudi Arabia could increase oil production if necessary, but there are no incentives for Saudi Arabia to do so at this point. Saudi Arabia is able to cut exports to the United States while keeping its Asian customers satisfied at lower rates of production. It has the spare capacity to increase production if necessary, but it would prefer not to overextend its oil fields. President Trump's comments are irrelevant to Iraq, because it is already producing more than its OPEC quota. Iraq will likely continue to overproduce for its own reasons, regardless of what others want. The UAE and Kuwait could increase production a bit, but right now there are no significant incentives for them to do so.

Both Venezuela and Iran could increase production and exports, but they are effectively prevented from doing so by President Trump's own sanctions.

President Trump argued in his tweet that higher oil prices would hurt the "fragile" global economy. This is debatable, because current oil prices are still not that high relatively. Furthermore, a significant drop in oil prices could harm the American economy .

Very low oil prices could stimulate demand, especially from China. However, if oil prices dropped back into the $30 or $40 per barrel range, it could seriously damage the U.S. oil industry which is a significant component of U.S. economic growth. Low oil prices right now could deal a serious blow to fracking firms that are facing significantly tighter purse strings from Wall Street. According to a Wall Street Journal study, many smaller fracking firms have relied on a continuous flow of money from banks and hedge funds to keep their operations going, and they are now seeing these funds dry up. If oil prices dropped significantly, the industry could face another round of consolidation with well-capitalized firms taking advantage of bankruptcies to acquire smaller firms and more acreage. Jobs would be lost as a result, and U.S. oil production would decline in the process.

For President Trump and the U.S. there is a fine line between good low oil prices and too low oil prices .


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