Global Energy - February Commentary

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THE TRUMP ADMINISTRATION AND GLOBAL ENERGY

One month into his presidency, Donald Trump is already having an impact on global energy markets. This month, we review the executive orders that he announced on his first day in office and the potential impact of tariffs on energy imports from Canada and Mexico that were threatened at the end of January.

Executive orders relating to energy

Many of the executive orders from 20th January, the first day of President Trump’s new term, relate to the energy sector. We provide a summary here of some of the key ones relating to the outlook for the upstream oil and gas industry:

• Declaring a national energy emergency
  This order calls for using emergency powers to facilitate the leasing, siting, production, transportation, refining and generation of energy. In essence, Trump is seeking the authority to i) reduce environmental restrictions on existing energy infrastructure and ii) ease permitting for new transmission and pipeline infrastructure in order to expedite the completion of infrastructure and natural resource projects.
• Arctic oil & gas exploration and production
  This order repeals Biden's efforts to block oil drilling in the Arctic and along large portions of the American coast. Trump also repealed a 2023 memo that barred oil drilling in some 16 million acres (6.5 million hectares) of the Arctic.
• Refilling of the Strategic Petroleum Reserve
  This order states that Trump plans to fully refill the US Strategic Petroleum Reserve (SPR). The SPR has been drawn down to multi-decade lows in response to high oil prices post the start of the Russia-Ukraine conflict in 2022. Storage levels currently sit at 394 MMbbls (million barrels) vs a peak of 727 MMbbls in 2010. Refilling the SPR to peak levels at a cost of $70/bl would cost the United States government around $23bn.
• Resuming the permitting of new LNG export schemes
  This order calls for the resumption of liquefied natural gas (LNG) export permit applications from new LNG projects supplying Asia and Europe, effectively reversing a pause Biden put in place in early 2024 to study the environmental and economic effects of the export schemes. The US is the world’s largest exporter of LNG and, as part of his orders, Trump also called for the development of LNG in Alaska.

Other orders associated with the longer-term outlook for the oil and gas industry included the withdrawal from the Paris Agreement and the revocation of Biden’s 2021 electric vehicle (EV) targets. The withdrawal from Paris was much expected and was indeed a repeat of the withdrawal made in his first term. Trump has previously called climate change a hoax, and says the accord puts the United States at a competitive disadvantage to geopolitical rivals like China. Trump said "I'm immediately withdrawing from the unfair, one-sided Paris climate accord rip-off," and "The United States will not sabotage its own industries while China pollutes with impunity." The revocation of EV targets was also widely expected and was accompanied by a halting of unspent government funds for vehicle charging stations and the removal of a waiver which allows certain states (California and 11 others) to adopt zero-emission vehicle rules by 2035. Trump also said his administration would consider ending EV tax credits.

Trump’s proposed tariffs relating to energy

At the end of January, Trump threatened a series of tariffs on key trading partners, thereby delivering on a key election campaign promise. Of specific relevance to the energy industry, there were 10% tariffs on Canadian and 25% tariffs on Mexican energy imports, effective from 4 February 2025, although these tariffs were later delayed by one month. The size and the nature of the tariffs was broader than many had anticipated and their duration remained unclear as they are related to the delivery of tighter border restrictions with both Canada and Mexico.

In terms of quantum, the US imports around 4 million barrels per day of Canadian oil (representing around 60% of total US crude oil imports) and around 70% of this oil is processed in refineries in the US Midwest. Mexican oil imports are less significant, with around 0.45 million barrels per day of Mexican oil being imported mainly for refineries concentrated around the Gulf Coast.

Over 90% of this imported crude oil is heavy in nature (with an API gravity in the 20-25 degree range) and, if implemented, the tariffs will likely cause wider differentials between different US crude oil grades. Heavy oil is typically not easy to replace and, since the north American oil logistics system is very highly integrated, it is likely that the extra burden of around $5-6/bl of tariff would be suffered across the value chain and shared across producers, midstream companies, refiners and consumers. At this stage, we do not expect any supply shocks.

At the final moment, the Canadian and Mexican governments promised to improved border controls and the tariffs were delayed by a month. However, an extra 10% tariff against Chinese imports did proceed as planned and the Chinese government retaliated with 15% tariffs on the import of US coal and liquefied natural gas plus a 10% tariff on US oil imports. We note that Chinese imports of US energy are quite small, being around 0.23m b/day of crude oil (around 2% of total US oil exports) and around 4mtpa of LNG (around 6% of total US LNG exports).

The likely impact of Trump’s executive orders and tariffs

In summary, it is clear from his executive orders that Trump is seeking to rapidly develop the potentially abundant and cheap energy resources of the United States, with the aim of achieving complete energy independence and energy security. Easing the development of oil and gas resources could provide high quality upstream employment and would facilitate growing manufacturing industries that would create further jobs and support economic growth. These aims are quite clearly being prioritised over environmental concerns and his proposed tariffs indicate that he is willing to tolerate potentially greater inflation in order to rebalance the trading position of the United States.

Although his inauguration speech included a reference to “drill baby, drill”, Trump’s executive orders did not directly reference the phrase. While looser US oil field regulations and greater federal lands will help investment at the margin, we do not believe that it will derail the industry’s focus on free cashflow over growth. Historically, the politics of the US President have not impacted US oil production levels and we do not expect that trend to change.

US onshore oil production 1920-2024 (m b/day)

Source: Morgan Stanley, 2024

In contrast, we believe that Trump could have more of an impact on international oil markets in 2025 than he can have on his own domestic oil market. His actions in 2025 could materially impact supply, most likely negatively, from Russia, Venezuela and Iran and potentially allow OPEC+ some room to return some of their withheld volumes back to the market:

Regards Venezuela, Trump said in recent days that his administration would likely stop buying oil from Venezuela and was looking "very strongly" at the South American country. Shortly after his inauguration, Trump said that "Venezuela was a great country 20 years ago, and now it's a mess," and that “We don't have to buy their oil. We have plenty of oil for ourselves”.

Regards Iran and Russia, Trump was relatively quiet in his first few days. In his campaigning Trump was very clear in his hawkish stance towards Iran and his pick for national security advisor, Mike Waltz, promised “maximum pressure” on Iran. We note that during Trump’s presidency, Iranian exports fell by around 2m b/day in less than two years as a result of his harder line on sanctions. Consistent with his campaigning, early in February, Trump signed an executive order requiring the US Treasury secretary to impose "maximum economic pressure" on Iran.

Iranian oil exports (monthly, kb/day)
Red denotes Trump presidency; blue denotes Obama and then Biden

Source: JP Morgan, Kepler, January 2025

In conclusion, while the quantum and rapid delivery of his executive orders was impressive, overall we find these announcements are consistent with his election campaign and there are not many positive or negative surprises that would affect our view of the oil supply demand outlook for 2025.

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