Trump Presidency: Impact on the US Economic Outlook …eneken.ieej.or.jp/data/7254.pdfEnergy...

Energy Intelligence Group IEEJ Seminar

1Copyright © 2017 Energy Intelligence Group

Trump Presidency: Impact on the US Economic Outlook and US Energy Policy

March 27, 2017

Energy Intelligence Group

Briefing

IEEJ：April 2017 © IEEJ2017


2

▪Globalism in Retreat

– US election accelerated recent trends

– Global status quo under pressure

▪Trump’s Trade and Economic Policies

– Economic nationalism

– Trade agreements under threat

▪US Energy and Climate Policy Under Trump

– Energy is central to economic message

– Strong effort to reverse Obama’s climate legacy

– Trump team likely to favor US LNG exports

– Shale production stabilizing, and could return to growth

Agenda



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01Globalism in Retreat

▪ US election accelerated recent trends

▪ Global status quo under pressure



4

Globalism in Retreat: Trump’s Election Accelerates Recent Trends

Challenges for global cooperation

Focus Issues

▪ Systemic Economic Risks

▪ Global Trade and Financial

Cooperation

▪ Economic Openness

▪ EU cooperation exposed during euro crisis.

▪ TPP and TTIP talks have stalled; revisions to

existing trade ties are possible.

▪ The UK’s future global trade ties are also uncertain.

▪ Climate Policy

▪ Policy Orientation of Major Powers

▪ Trump is unlikely to fulfill US climate goals, setting a

low bar for other countries.

▪ Populism could gain traction Europe this year.

▪ Great Power Relations

▪ Managing Global Conflict

▪ US-China relations are already in question.

▪ Global security concerns range from Trump’s vows

to defeat Islamic State to North Korea.

Developments and Implications

▪ 2016’s Brexit and the election of Donald Trump are only the latest signals of a general retreat from a

globalist policy orientation.

▪ International norms and institutions are being questioned, particularly as the United States aims to

reverse course on landmark agreements, such as the Paris climate accord and Iran nuclear deal.

▪ The result is widespread uncertainty over previous “givens”: US security policy, trade approach, and

foreign relations.



5

Global Status Quo Under Threat: Challenges to World Order

▪ The events of 2016, especially the Brexit

vote and Trump’s election, are the latest

steps in a longer historical arc.

▪ Western, liberal ideas first rise to

prominence shaping the post-WWII global

order, but have faced growing challenges

over the past few decades.

▪ In the West, lasting damage was done by the

2008-09 financial crisis. This, combined with

underlying trends in demography, migration,

globalization and automation, forms the basis of

the current political malaise.

▪ With the status quo under pressure in

developed Western economies, alternatives are

gaining in prominence elsewhere. Authoritarian

rule looks to be on the rise.

Potential turning point in dominance of liberal democracy and capitalism

Rule-Based International Politics

Liberal Capitalist Economics

▪ A rule-based international order, built around

international institutions.

▪ Confidence in liberal democracy, and a vision

of a growing club of democratic nations.

▪ Support from the United States has played a

central role in promoting and defending this

order, even if Washington has, at times, lost

patience.

▪ Characterized by free trade, globalization,

technological innovation and accelerated

movement of ideas and labor.

▪ Globalization boosted in the 1990s by free

trade agreements such as NAFTA and the

creation of the WTO.

▪ Explosive growth in China and other Asian

economies has turbocharged globalization.



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Japan Euro area US UK

GDP per Capita Growth, by Decade (average %)

1960s 1970s 1980s

1990s 2000s 2010s

Source: World Bank

Global Status Quo Under Threat: Western Model Under Pressure

▪ Key megatrends have constrained economic growth, while

contributing to political dissatisfaction and radicalization.

▪ The 2008-09 global economic crisis cast a long shadow,

including a weak recovery in the United States, and economic

stagnation along with lingering debt crises in Europe.

▪ However, the economic malaise has deeper roots, starting with

demographic change, especially in Japan and continental

Europe.

▪ The demographic mismatch with faster-growing populations in

the Middle East, Latin America and Africa is creating huge

migration pressures.

▪ Concerns over immigration are part of a broader critique of

globalization and its consequences. While adaptable, educated

employees have often benefited, less-skilled manual workers

have seen jobs move to cheaper overseas locations.

▪ Even where manufacturing has stayed in place, increased

automation and efficiency have reduced manpower

requirements (see US example to the right).

▪ Taken together, these trends have coalesced into a wave of

widespread dissatisfaction with mainstream politics.

Advanced Western economies face growing headwinds

9.1%

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1990

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2014

2016

US Manufacturing Sector (2009=100)

Real Output Employment

Source: St. Louis Federal Reserve



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02Trump’s Trade and Economic Policies

▪ Economic nationalism

▪ Trade agreements under threat



8

Trump’s Worldview

▪ Trump’s populist platform has resonated

strongly with the white working class,

who feel their identities are under attack.

– Economic nationalism was a key theme

of his campaign, and it comes across

clearly in his policy priorities.

– He seeks to reverse the damaging

effects of globalization for the working

class, with trade viewed as a key factor.

▪ Trump appeals to the nativist and

xenophobic impulses of his voters by

focusing on “radical Islam” and other

threats coming from abroad.

– He also has adopted an isolationist

stance, with his “America First” message.

▪ Trump has criticized Obama’s climate

policy on economic nationalist grounds,

and sees stepped up fossil-fuel

investment as a central priority.

Economic nationalism

Art of the Deal• In a zero-sum world,

deal-making is about

winners & losers

• Belief in Trump’s own

deal-making skill

Revive US

Economic Power• Reverse damaging

effects of globalization

• Booming economy to

boost jobs, incomes

Government

is the

Problem• Reduce taxes

• End onerous

regulations

• Not the role of

government to

choose winners

America

First• US interests

must come first

in international

dealings

• Strength is the

key to peace

“Winning” in

deal-making

and diplomacy

Policies tend to

benefit

corporations,

rather than

workers

Economic

nationalism

Ideal of Trump

as only man

capable of

fixing

government

Trump Worldview: Guiding Ideas

Make

America

Great

Again



9

Trump is Centralizing Authority

▪ Trump’s first two months in office show that he

is centralizing authority. He is keeping decision-

making on key issues within a small circle of his

family members and several close advisors.

▪ The White House seems determined to limit the

capacity and autonomy of government

agencies.

– Trump’s first budget aims for enormous cuts at

the EPA, State Department and many other

agencies.

– The White House is deliberately under-staffing

various departments—with many vacancies at

the “under-secretary” level.

– There are still no press secretaries at many

government agencies, and no regular press

briefings. This reflects Trump’s efforts to freeze

out, and even delegitimize, the media.

▪ When a crisis occurs globally (for example a

war or economic crisis), under-staffing and

policy drift will make it harder to respond

effectively.

Effort to cut funding and eliminate staff at government agencies

-40 -30 -20 -10 0 10

EPA

State and USAID

Agriculture

Labor

Corps of Engineers

Health and Human Services*

Commerce

Education

Housing and Urban Development

Transportation

Interior

Overseas war ops./disaster relief

Others

Energy

Small Business Administration

Treasury**

Justice

NASA

Social Security*

Veterans Affairs

Homeland Security

Defense

Trump's Proposed 2018 Budget(% change from current spending)

Source: Office of Management and Budget

*Does not include spending on entitlement programs **Does not include interest payments on federal debt



10

Trump’s Challenges

Trump’s Challenges

▪ Trump has challenged traditional Republican

approaches on trade, social issues, foreign

policy and many other areas. But he is

constrained by the Republican agenda in

Congress.

▪ Trump likely would prefer to focus on

infrastructure, trade and jobs. Those were the

issues that propelled him to the White House,

and won support from working class voters.

▪ Instead, Republicans in Congress are

embroiled in trying to reform the US health care

system. This is a risky endeavor, and if the

Republican health care plan turns out badly, it

will diminish Trump’s leverage and his

momentum.

▪ The same could be true with tax reform.

Trump vs. The Republicans

Trump essentially ran as a third party candidate, but must govern as a Republican

Deep internal divides in

Republican Party

Differing priorities

between Trump and Republicans

Trump unpopularity

reduces leverage

Near-zero support from Democrats on

key issues



11

Trump Promises Rapid Growth, but Agenda Conflicts with His Party

▪ Trump has promised to unleash breakneck economic growth and add 25 million jobs in the next

decade.

▪ But his policy prescriptions favor businesses, rather than workers, signaling a continued belief in

“trickle down economics.” Priorities include cutting taxes and curbing regulations, and stimulating

infrastructure investment, but also challenging global supply chains through protectionist measures.

Infrastructure spending is a lower priority for Republicans in Congress

▪ Simplification of tax code, and large tax cuts for

both households and firms.

▪ Cut top tax rate from 39.6% to 33%. Corporate

tax rate would fall from 35% to 15%, and would

apply to partnerships and sole proprietorships.

▪ No changes to Medicare or Social Security.

Tax Policy

▪ Spur $1 trillion in transport, water, power, and other

infrastructure investment in 10 years, with aim of

adding millions of jobs.

▪ Offer tax credits and public-private partnerships to

fund plan, although key areas will fail to attract

private investors.

Infrastructure Investment

▪ Overhaul Dodd-Frank Law regulating banks, to limit

regulations and oversight by the Federal Reserve

and the Securities and Exchange Commission

(SEC).

▪ Ease regulations for small banks and credit unions.

Financial Sector Regulation

▪ Ties many lost blue collar jobs and declining

wages to expanding global trade.

▪ Calls for “fair” trade deals, by securing better

terms for US workers and punishing violators.

Trade Policy



12

Trump’s War on Trade

▪ Trump campaigned on the misleading idea that

he could boost the US economy and protect

American jobs by renegotiating “bad” trade

deals and punishing trade cheaters.

▪ Trump wants to encourage firms to set up

manufacturing plants in the United States rather

than abroad, and eliminate the trade deficit.

▪ His advisors have a misguided belief that trade

deficits drag down growth.

– Trade surpluses or deficits are not inherently good or

bad.

– The US maintains its trade deficit because it has a

capital account surplus, due to enormous capital

inflows.

▪ These mercantilist policies, combined with

Trump’s self-image as a master negotiator and

deal-maker, suggest the US is serious about

attempting to re-negotiate Nafta and other trade

deals.

▪ Trump officials have attacked the trade policies

of China, Mexico, Japan and Germany—four of

its five largest trade partners.

Trade policy will be a top priority for the Trump White House

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Chin

a

Canada

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xic

o

Jap

an

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any

S.

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Fra

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India

Ta

iwan

United States' Top 10 Trade Partners in 2016US$ bn

Imports Exports Trade Balance

Source: US Census Rank order of overall trade

Trump Worldview: Why US is

“Losing” in Trade

▪ States with Value Added

Tax (VAT) have unfair tax

advantage

▪ Currency manipulation by

China, Japan, EU

▪ “Cheating” under WTO

rules



13

The Risks of Trump’s Approach to Trade

▪ Trump’s proposals have signaled that Washington may discard

long-established rules governing trade.

– Proposals in Congress for “border adjusted taxes,” as well as

some of Trump’s proposals for “defensive tariffs,” may be illegal

under WTO rules.

▪ China and Mexico collectively account for 30% of total trade with

the United States. If a trade war erupted between the United

States and “just” these two countries, the economic shockwaves

would likely result in a global recession.

– Even if a trade war is averted, a decision by Trump to step back

from the US’s decades-long role of promoting trade liberalization

will limit medium-term global economic growth potential, and

weaken US leadership on global economic policy.

▪ Abandoning the Trans-Pacific Partnership (TPP)—the regional

trade grouping that excluded China—has opened the door for

Beijing to emerge as a champion of trade liberalization.

▪ But replacing the United States with China—a juggernaut, but

still lacking the scale of the US economy—as the engine of

global trade flows could limit economic growth.

More aggressive policies and shirking of rules create risk of trade wars

Trump’s Trade Architects

▪ Peter Navarro, head of Trump’s

new National Trade Council, is

an unorthodox economist, who

was little-known before being

tapped by Trump. Most of his

recent writing has focused on

China, which he accuses of

currency manipulation and other

tactics designed to boost exports

and undermine trade partners.

▪ Wilbur Ross, Commerce

Secretary, will play a key role in

trade policy. A private equity

billionaire, Ross seems an

unlikely figurehead for Trump’s

populist economic agenda.

Some key Trump advisors,

especially Navarro, seem

unfazed about destabilizing the

existing global trade order.

Indeed, they think such a break

is necessary.



14

Trade Agreements Under Threat

Growing obstacles to trade cooperation

Key Global Trade Initiatives Under Threat

TPPTrans-Pacific

Partnership

Days after taking office, Trump issued an executive order that withdrew the

US from TPP negotiations, and promised to pursue bilateral deals instead

that will “promote American industry and protect American workers.” TPP

was signed in February 2016 but has not been ratified by the US Congress.

Asian economies may now look to the Regional Comprehensive Economic

Partnership (RCEP), including China and India.

NaftaNorth American Free

Trade Agreement

Trump has pledged “to get a better deal for American workers,” potentially

including tariffs on some goods imported from Mexico and Canada. If they

do not agree, Trump threatens the United States will withdraw altogether.

Commerce Secretary Wilbur Ross says he wants to begin renegotiations in

the coming weeks.

TTIPTransatlantic Trade

and Investment

Partnership

The prospects for TTIP were already dimming after a 14th round of

negotiations concluded in mid-July with major differences still to be worked

out. Public support for the deal has fallen with the rise of anti-trade rhetoric

on both sides of the Atlantic. Trump’s election is widely seen as the death

knell for TTIP.



15

Questions over US Role in Pacific Security

▪ Trump’s election has raised doubts over the US role in security

in Asia. But even before Trump, US commitment to Asian affairs was

called into question.

▪ The much-heralded “pivot to Asia” under Barack Obama failed to

translate into concrete policies.

▪ During his campaign, Trump criticized large US troop

deployments in South Korea and Japan, suggesting that Asian

states need to do more to ensure their own security.

▪ He has signaled that Washington is less committed to providing

global goods, including maritime security.

▪ The US-Japan alliance has anchored the regional security

framework for decades, but a reduced US commitment to

Japanese security is a possibility.

▪ Freer US-Japan trade may be stifled. But Trump’s market

orientation and vows to cut regulations favor US oil and gas

output and exports. This could support Japanese energy

security goals, including diversified supplies and pricing.

Trump questions the core tenets of Pax Americana and maritime security in Asia

Energy Security in Asia: The

Washington-Beijing Rivalry

▪ There is a tendency to view

Pacific security issues as a

zero-sum competition between

Washington and Beijing.

▪ It is quite possible that the

Trump administration will end up

following a path of greater

confrontation with China in trade

and security matters, raising the

risk of escalations in the East

China Sea and South China

Sea.

▪ But if Pax Americana in the

Pacific appears to be eroding

over the medium to longer term,

the Asian states may find they

need to work much more closely

on energy security issues.



16

03US Energy and Climate Policy Under Trump

▪ Energy is central to economic message

▪ Strong effort to reverse Obama’s climate legacy

▪ Trump team likely to favor US LNG exports

▪ Shale production stabilizing, and could return to growth



17

▪ Trump has vowed to roll back regulations. But in

reality, the federal government does not pose many

obstacles to access, and states regulate most

unconventional activity.

Regulatory Rollback

Energy Sector is Central to Trump’s Economic Message

▪ Trump is much more sympathetic to fossil-fuel industries than the Obama administration. He can also expect support for his agenda from a Republican-majority Congress.

– Democrat and environmentalist opposition is likely to flare up externally.

– Fierce hostility can be expected on the ground, and in the courts, in opposition to activity such as drilling and pipeline construction.

▪ Market forces drove the last decade’s domestic boom (and subsequent bust) first in gas and then oil, and also lie behind the demise of coal. The industry has been a victim of its own success.

▪ Trump’s suggested reforms may allow the US hydrocarbon sector to cut costs and boost output, but in so doing will likely add to the abundance in the global opportunity set.

▪ The main challenge for the oil and gas industry in the US today is economics, not access or excessive regulations.

Oil and gas companies have a strong ally in the White House

▪ Trump wants to reverse Obama-era initiatives, and

end or undermine the Paris Agreement and Climate

Action Plan, while weakening the EPA.

Climate Policy Reversal

▪ Trump has limited ability to open new federal areas

(offshore the East Coast and Alaska, for example)

until the next five-year OCS plan (2022-2027).

Opening Federal Areas

▪ Trump signed an executive order to speed up

Keystone XL and has backed the controversial

Dakota Access pipeline.

Infrastructure Approvals



18

Climate Policy: Reversal of Obama Agenda

▪ It is clear that Trump intends to reverse

course on Obama-era climate measures. In

these aims he is very likely to enjoy the

support and encouragement of Republicans

in Congress.

▪ Trump is likely to focus on what he dislikes

about climate policy: excessive regulation

imposed by bureaucrats at home (especially the

Environmental Protection Agency, or EPA) and

abroad (under the Paris Agreement).

– Trump wants the EPA to play a much

narrower role in environmental protection.

– His stated desire to withdraw from the Paris

Agreement reflects his mistrust of

international agreements and bodies.

▪ Republicans in Congress have largely opposed

efforts to restrict emissions, and Congress may

even push for harder, faster action than the

White House.

Congress expected to support broad attack on regulating emissions

Issue Possible Actions

Paris

Agreement

▪ Trump has promised to “cancel” the Paris

Agreement on Climate Change.

▪ The US will likely refuse to participate and

implement its pledges, and will cut funding for

decarbonization programs.

EPA

Powers

▪ Trump’s budget proposal would cut EPA

funding by 31%, eliminating funding for nearly

all climate research and energy efficiency

programs.

▪ The new EPA head is a climate change

skeptic, who sued the agency numerous

times.

Clean

Power Plan

▪ Trump and congressional Republicans are

largely united in their opposition to Obama’s

Clean Power Plan (CPP), which governs

power-sector emissions.

▪ Trump’s proposed budget would eliminate the

EPA’s funding for CPP implementation.

CAFE

Standards

▪ CAFE standards, governing emissions for cars

and light trucks, are due to tighten (to 54.5

mpg by 2022-2025). But a recent White House

decision gave the EPA a chance to review this

target until 2018.



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Anticipated US LNG Export Capacity Additions, 2017-2020(million tons per year)

Source: Energy Intelligence, based on company presentations

- Sabine Pass T5

- Corpus Christi T2

- Corpus Christi T1

- Freeport T3

- Freeport T2

- Freeport T1

- Cameron T3- Cameron T2- Cameron T1

- Cove Point T1

- Sabine Pass T4

- Sabine Pass T3

- Sabine Pass T2

- Sabine Pass T1

- Elba Island

US LNG Exports: Political Support Should Remain Strong

▪ The Trump administration seems unlikely to block efforts to export more US LNG. Trump, and

Energy Secretary Rick Perry, both have a pro-industry outlook, and certainly seem to favor exports.

▪ It is possible that the Department of Energy (DOE) could move back to a “conditional approval”

process for LNG exports to non-FTA countries.

▪ One potential challenge in the near term is staffing at the Federal Energy Regulatory Commission

(FERC). Normally there are up to five commissioners, but at present there are only two. They do not

have quorum to issue final decisions.

General pro-export policies apply to the oil and gas sector as well



20

Tax Reform Could Have Deep Impact on Refiners

▪ Proposals for a “border adjustment” tax could have a major impact on the oil sector. For US refiners,

imported crude would become more expensive, but exports of refined products would be exempt

from taxes.

– The goal is to reduce US crude imports, and to provide more incentives for domestic production.

– Those refineries that cannot export refined products will probably have to pass on the higher costs to their

customers. So presumably, US pump prices will rise.

▪ Backing for this border adjustment tax in Congress appears to be fairly weak. Trump has not yet

committed to support it.

But support for the proposed “border adjustment” tax seems to be weak

More disadvantaged

▪ East coast and West Coast refiners are dependent on crude

imports

▪ Mid-continent refiners expanded coking capacity several years ago,

and cannot export

Better able to adjust

▪ Gulf Coast refiners with coking capacity are optimized to import

heavy crude from countries like Venezuela, Mexico and the Middle

East.

▪ But the Gulf Coast refiners have more options: better access to

domestically produced crude, and lots of export capacity.

Impact of a “Border Adjustment Tax” on US Refiners



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US Shale Rig Counts

WillistonEagle FordDJ-NiobraraCana-WoodfordPermian (Right)

Source: Baker Hughes

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US Shale Productivity (b/d per rig)

Bakken

Eagle Ford

Niobrara

Permian

Source: EIA

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US LTO: Cumulative Changes in Oil Output Since July 2014(mb/d)

Permian Eagle Ford

Bakken Niobrara

Utica Haynesville

Marcellus Total

Source: EIA

US Shale: Production Begins to Stabilize

▪ US shale production has stabilized and activity

is beginning to increase—but in response to

prices rather than policies.

▪ Opec’s action to manage markets provided an

opportunity for producers to hedge forward

production.

– Project economics in the Permian have held up

despite the price pressure.

– But the increase in January price levels was

sufficient to support increased activity in all

basins.

▪ Soaring productivity rates per rig and

plummeting costs have played a key role.

Increases in efficiency reflect using the best

crews on the best rigs, but also durable

measures such increasing the use of proppants

and sand.

▪ The completion of drilled but uncompleted wells

(DUCs) has also helped to mitigate declines,

especially in the Bakken and the Eagle Ford.

US output begins to stabilize due to the prolific Permian Basin and increasing rig efficiency



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Oil Prices and Permian Rig Count

WTI ($/b, Right)

Permian Rig Count (Left)

Source: Baker Hughes, Reuters

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Cumulative Shale Rig Count Changes Since Oct. 7

Permian

Eagle Ford

Cana-Woodford

Williston

DJ-Niobrara

Source: Baker Hughes

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To

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US Shale Wells Drilled and Completed, and Total DUCs

Bakken Eagle Ford

Niobrara Permian

Total

Source: EIA

US Shale: On the Cusp of a Return to Growth

▪ Looking forward, US shale production appears

to be on the precipice of a return to growth in

2017, even at current or near current price

levels.

▪ Permian growth looks to build upon its recent

strong performance.

▪ Activity in other basins is likely to increase, but

should remain muted compared to the

production boom in 2011-2014.

▪ US shale production for 2017 will be largely

immune to any further price pressure, should oil

prices continue to weaken.

– Project economics have improved more

significantly than in other E&P play types.

– Hedging of future production guarantees

companies minimum needed returns.

▪ The inventory of drilled but uncompleted wells

(DUCs) provides further room for production

growth at current price levels.

Conditions appear ripe for shale to return to growth in 2017 at current price levels



23

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M iddle E as t & As ia -P ac i f i c

15A T em p le S t ree t , #02 -01

S ingapo re 058562

T e l : +65 6538 0363

Duba i Med ia C i t y

A l T hu raya T ower 2 - 1907

P .O . B ox 502803

Duba i - UA E

T e l : +971 4 364 2607 /26 08

1s t f l oo r , F re i j B l dg , S odeco

P res i den t E l i as S a rk i s S t ree t

B e i ru t , Lebanon

T : +961 1 614282 & 3


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