Graphic content – September; is Trump right to want a lower oil price?

Jack Norris
Written by

26th September 2018

Recent tweets by President Donald Trump have berated OPEC (Organisation of the Petroleum Exporting Countries) for their role in contributing to higher oil prices. Given the disruption to the global economic and political system in the last year, we may expect flexing of US geopolitical muscle to influence OPEC production decisions going forward.

@realDonaldTrump

The introduction of shale production over the last decade has changed the nature of the US economy’s relationship with the oil price. The size of the shale sector itself and the connected US industries servicing the sector are important for the US economy. We saw this in 2014, when the oil price dropped precipitously. At the time, markets expected the windfall for consumers from lower oil prices would help the US economy, as it boosted their purchasing power. Instead, the effect of lower oil prices on oil-related businesses and financial markets contributed to lower US GDP growth.

US GDP compared to Crude Oil Prices 2014 to 2018
Source: Bloomberg, 30/06/2014-30/06/2018.

Of course, you can also argue causality might run the other way. Oil prices are supported by greater demand and strong economic growth in the US. In reality, it is probably some inter-related combination of the two. Nonetheless, President Trump should be careful with this notion that the US economy would definitely be better off with lower oil prices. If he were to push for a dramatic fall in oil prices to help consumers, this may come back to haunt several of his own country’s companies.

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