The world has probably not been in such a pervasively dangerous position since the end of the Second World War, so the question of who leads the world’s leading power has never been more critical. As oil is a crucial determinant of every country’s financial and economic future, it plays a vital role in shaping the domestic and international politics of the world’s major oil producing and consuming countries. And because the stakes are so high, the energy policies of the new U.S. president – Kamala Harris or Donald Trump – will be critical to how wider global events play out in the coming four years.
Harris is expected to follow the broadly greener energy approach of the administration of President Joe Biden, while former President Trump has made it clear his priority is that the U.S. must have “the number lowest cost energy of energy of any industrial country anywhere on Earth”. Crucially, though, on the issue of the price of oil - and gasoline, which historically is around 70 percent derived from this – the two candidates are likely to be in broad agreement that these should be kept in check. There are two key reasons for this, one political and the other economic, although they are closely related, as analysed in full in my latest book on the new global oil market order. The political reason is that since the end of World War I in 2018, the sitting U.S. president has won re-election 11 times out of 11 if the economy was not in recession within two years of an upcoming election. However, sitting U.S. presidents who went into a re-election campaign with the economy in recession won only one time out of seven. Even this only win is debatable, as the winner - Calvin Coolidge in 1924 - had not strictly speaking won the previous election (and thus could not be ‘re-elected’), but rather had acceded to the presidency automatically on the death in office of Warren G. Harding. The same pattern broadly applies to the re-election chances of candidates of the president’s party in U.S. mid-term elections as well, the outcome of which affects the ability of the incumbent leader to push ahead with their legislative agenda for the last two years of their presidency.
In turn, the chance of the U.S. economy being in recession within two years of an upcoming election is dramatically increased as the oil (and gasoline) price rises, as also detailed in my latest book. Longstanding estimates are that every US$10 pb change in the price of crude oil results in a 25-30 cent change in the price of a gallon of gasoline, and for every 1 cent that the average price per gallon of gasoline rises, more than US$1 billion per year in consumer spending is lost. According to a 2016 study by Laurel Harbridge, Jon A. Krosnick, and Jeffrey M. Wooldridge called ‘Presidential Approval and Gas Prices’, a 10 cent increase in gasoline prices correlated with a 0.6 percent decrease in presidential approval over the study period from January 1976 to July 2007. In any event, the statistics make sober reading for incumbent U.S. presidents and the senatorial, congressional and gubernatorial candidates of their party when considering how to handle domestic and international policies related to the oil price. As Bob McNally, the former energy adviser to former President George W. Bush put it: “Few things terrify an American president more than a spike in fuel [gasoline] prices.” Historically, a gasoline price of under US$2 per gallon of gasoline has been most advantageous for U.S. economic growth, and US$2 per gallon has historically also equated to a West Texas Intermediate (WTI) oil price of around US$70 per barrel. As WTI has historically traded at a discount of between US$5-10 per barrel to the Brent oil benchmark, this US$70 per barrel of WTI price broadly equates to around US$75-80 per barrel of Brent.
This is why there has been far less divergence in such policies over the past 10 years that directly affect the oil price than many might imagine. During his term in office, President Trump very vigorously sought to enforce a ‘Trump Oil Price Trading Range’ with the lower part set at around US$40-45 per barrel of Brent and the upper part at US$75-80 per barrel, as analysed in my latest book on the new global oil market order. The top side was geared to the optimal level to spur U.S. economic growth, and the bottom side to the minimum level required for healthy U.S. shale producers to breakeven and to make a decent profit on top. Following the end of the 2014-2016 Oil Price War instigated by Saudi Arabia to destroy or at least severely disable the then-nascent U.S. shale oil industry, the sector had stunned everyone by reorganising into a leaner, meaner oil-producing machine capable of breaking even at the low-US$30 per barrel pricing area of Brent level if needed.
Consequently, Trump was never in any mood to tolerate any nonsense from OPEC in general, and Saudi Arabia in particular, that affected his carefully chosen Oil Price Trading Range. When Saudi Arabia (with the help of U.S. Cold War nemesis Russia) was pushing oil prices up over the US$80 per barrel of Brent level in the second half of 2018, Trump sent a clear warning to Riyadh to stop doing this, as also detailed in my latest book. Specifically, in a speech before the United Nations General Assembly, he said: “OPEC and OPEC nations are, as usual, ripping off the rest of the world, and I don’t like it. Nobody should like it.” He added: “We defend many of these nations for nothing, and then they take advantage of us by giving us high oil prices. Not good. We want them to stop raising prices. We want them to start lowering prices and they must contribute substantially to military protection from now on.” As the Saudi Arabian- and Russian-led OPEC+ oil production cut agreement continued to push oil prices up in that period, to slightly over the top band of the Trump Oil Price Trading Range, Trump made the same warning again, even more clearly at a rally in Southaven, Mississippi, in October 2018. He said: “And I love the king, King Salman, but I said, ‘King we’re protecting you. You might not be there for two weeks without us. You have to pay for your military, you have to pay.”’ Following Trump’s direct and clear warnings to Saudi Arabia’s Royal Family in the third quarter of 2018 of the catastrophic consequences if the Kingdom continued to keep oil prices higher than the US$80 per barrel Brent cap in the Trump Oil Price Trading Range, Saudi Arabia increased production and oil prices came down again. That period was the only part of Trump’s presidency that saw his Oil Price Trading Range breached.
The first half of Joe Biden’s presidency was able to keep this price range intact. However, following Russia’s invasion of Ukraine on 24 February 2022, it was significantly broken to the upside until around the end of December that year, when it settled back down to a level slightly above the top of the range. It is a testament to the acute awareness of U.S. presidents of all political leanings to the crucial importance of the oil and gasoline price that when Brent crude was trading over the US$100 per barrel level in the early aftermath of Russia’s invasion of Ukraine, moves were well advanced to strike a scaled-down version of the Joint Comprehensive Plan of Action, JCPOA, or colloquially ‘the nuclear deal’) with Iran. This was solely aimed at bringing the Islamic Republic’s then-3.5 million barrels per day or so of oil back into the global oil market to bring down prices, as thoroughly detailed in my latest book on the new global oil market order. These efforts were only truly derailed when Iran’s Islamic Revolutionary Guards Corps (IRGC) scuppered the possible deal (which still included within it measures aimed at destroying the IRGC) by giving the go-ahead to its proxy Hamas to launch murderous attacks on Israeli civilians on 7 October 2023. The strategy employed by Biden’s team since then, with Kamala Harris likely to follow if elected president, has been to balance the scaling up of sanctions against major energy producers Iran and Russia with allowing for the flow of sufficient of their oil and gas in the shadow market to keep prices at the lower end of recent historical levels. It has always been Biden’s intention, according to a senior Washington-based legal source who works closely on the U.S. sanctions team, to “snap the trap shut” on Iran and Russia once their energy resources were no longer required to keep the Oil Price Trading Range intact.
By Simon Watkins for Oilprice.com