Will Trump ban oil imports into the US?

The collapse in the oil price, especially in the United States, has wide implications, but primarily it may lead to radical interventions by President Donald Trump. Any protectionist moves

by the US to insulate its energy companies from the global market would severely impact the rest of us.

The moment when the US oil benchmark, West Texas Intermediate (WTI) turned negative on Monday, was a stunning development. I was on the phone at the time to an investment banker who seemed

to lose the power of speech. At one stage the price was minus $40 a barrel for May delivery. Such an extraordinary development needs context. This was the price on the US crude oil futures

market at the expiry of the May contract, driven by investors who were unable to take physical delivery of oil at the delivery point of Cushing Oklahoma, where storage tanks and pipelines

were full. They were in effect paying people to take it away from them. WTI for June or later delivery remained up around $20 a barrel, as did prices elsewhere in the world: Brent was well

over $20, though under pressure.

Inaugurated in 1983, WTI was the world’s first crude futures contract. Understandably it became the American benchmark, and is the still the oil price that Wall Street follows. North Sea

Brent came along five years later, and it was swiftly clear that it, not WTI, was best suited to be the international crude oil benchmark. Physically it could be shipped anywhere in the

world, and the UK — unlike the US — was committed to free trade in oil.  WTI, by contrast was strictly a US domestic crude, prohibited by law from being exported (though the bar was lifted

in 2015 to allow exports of shale oil). It was subject to all sorts of domestic market pressures which did not exist elsewhere in the world. It is landlocked and in circumstances like the

present, is distorted by inadequate infrastructure.

But the wider context is the collapse of the global oil market. This was initiated by the Saudi decision to drive down prices and punish US shale producers, followed swiftly by the Covid-19

pandemic and the worldwide economic contraction. Once the Saudis, Russians and other producers realised what was happening to the world economy, they decided to cut their crude exports by

9.7 million barrels a day. That is roughly 10 per cent of 2019 world oil demand.

But, as the International Energy Agency reported last week, world oil demand has dropped by nearly 30 per cent from a year ago. The gap between the Saudi and Russian cut — which hasn’t yet

happened – and the real world drop in oil consumption is vast. To close the gap would require something of the order of Saudi Arabia and Russia both shutting down their entire production. An

emergency OPEC meeting will try to bridge this gap, but it will be, to put it mildly, hard to achieve.

There’s another big player in this game, and that is Donald Trump, who has strongly protectionist instincts and is running for re-election in November. I caused a slight flurry on

petro-Twitter recently by suggesting that he could ban oil imports in order to protect US producers.

Trump is in a long line of presidents who have used presidential orders to intervene in the oil market over the last sixty years. Eisenhower imposed import quotas to protect US producers

from the cheap oil that began to flood out of the Middle East in the 1950’s. After the 1973 oil price shock, Ford and Carter protected consumers by imposing wellhead price controls and an

extraordinary bureaucratic system known as “entitlements”. Essentially this guaranteed that US oil refiners all paid the same price for their crude oil, which encouraged them to bid up the

prices of international crude oils they needed to import. The result was that the rest of the world paid a much higher price for oil than the US. This Soviet-style market distortion was, to

his credit, abolished by President Reagan on his second day in office in 1981.

The point is that presidents have the means to protect the US economy as well as the US oil industry. And if the rest of the world bears the cost, tough luck.

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