After Trump's latest tweetstorm, I'm honestly worried that the president doesn't have a basic understanding of how oil and gas prices work.
Donald Trump might fancy himself “A Very Stable Genius,” but I’m worried that he’s clueless about instability in financial markets. More to the point, I’m beginning to think he doesn’t even have a solid grasp on how oil and gas prices work.
Call it a calculated attempt to distract from Dr. Anthony Fauci’s Senate testimony if you want, but the president unleashed another one of his trademark Twitter tirades on Tuesday.
While his one-sided bromance with Elon Musk was admittedly low-hanging fruit, the real gem was this 275-character word salad about oil prices.
Crude Oil prices going up as Saudi Arabia cuts production levels. Our great Energy Companies, with millions of JOBS, are starting to look very good again. At the same time, gasoline prices at record lows (like a big Tax Cut). The BEST of all Worlds. “Transition To Greatness”
Wow, OK. There’s a lot to unpack there. So much that I’m afraid I’m going to have to leave what a terrible slogan “Transition To Greatness” is for another column from another pundit.
Trump is understandably excited about Saudi Arabia’s surprise decision to deepen its oil production cuts, on top of its commitments as part of the recent OPEC+ agreement. Altogether, the oil-rich Gulf nation’s daily crude output will decline by nearly 40% between April and June.
The news catalyzed a spike in U.S. crude futures, although oil prices didn’t rise nearly so far as Trump’s tweet might lead you to believe.
Shortly before 2 pm ET, June contracts on WTI crude futures had climbed 6.8% to $25.79.
That’s positive news for the supermajors, many of whom are using debt to finance their shareholder payouts. But $25-per-barrel oil will not save U.S. shale. Nor will it help “dividend aristocrat” Chevron extend its streak of 33 consecutive years of dividend hikes.
It might be a stretch to say U.S. energy stocks “are starting to look very good again,” but on the Trump scale of financial market punditry, it’s nothing remarkable.
But “nothing remarkable” has never been enough for Trump. And maybe that explains how quickly the rest of his tweet went off the rails.
Because immediately after trumpeting rising oil prices, he proceeded to tout the virtues of low gas prices.
Wait, Trump does know what causes gas prices to rise and fall, doesn’t he?
I’m worried that he doesn’t.
Energy markets are complex systems, but at a very basic level, gas prices track closely with the price of crude oil.
As the U.S. Energy Information Administration explains in the “basics” section of an article helpfully titled “Gasoline explained”:
Retail gasoline prices are mainly affected by crude oil prices and the level of gasoline supply relative to gasoline demand. Strong and increasing demand for gasoline and other petroleum products in the United States and the rest of the world can place intense pressure on available supplies.
We all know Trump is a visual learner, so here are two graphics to illustrate this point.
This chart tracks the correlation between oil and gas prices. It’s pretty air-tight.
So unless the government starts subsidizing either oil producers or gas consumers, we’re not going to have the “BEST of All Worlds,” like Trump claims.
And that brings us to our second chart, which depicts the correlation between gas prices and consumer demand. You’ll be shocked to learn that prices are governed by the law of supply and demand.
While everyone loves to pay less at the pump – I gleefully filled up my gas-guzzling 2008 Mazda CX-9 for just $1.15 per gallon last week – there’s a reason gas prices crashed so hard, so fast.
And it’s not one that anybody – much less the president of the United States – should be happy about.
A price war may have put downward pressure on crude, but the economic fallout from the coronavirus pandemic took out the demand floor.
With the global economy on ice, oil demand plummeted. And with virtually the entire United States on lockdown, gasoline consumption careened to its lowest level in decades.
To put it bluntly: You can’t take advantage of “record low” gas prices when you have nowhere to drive. And it’s not really more affordable if you don’t have a paycheck to buy it with.
Disclaimer: The opinions expressed in this article do not necessarily reflect the views of CCN.com. The author owns shares in Chevron.
Last modified: September 23, 2020 1:55 PM