Talk, baby, talk: why Trump's intentions to enforce lower oil prices are unlikely to scare Putin

As people speculate on how President-elect Donald Trump will fulfil his populist promises, many hold out hope that his actual stance toward Russia will be tougher than imagined and tougher than his opponents portrayed during the election campaign. They expect Trump to exert pressure on Putin, including in the energy sector.

Indeed, Trump has repeatedly stated his intention to sharply increase US oil production, thereby reducing hydrocarbon prices both domestically and globally. Some of his allies even believe that Trump plans to strike a deal with Saudi Arabia, which would allow the US to push Russia out of the oil market.

However, according to Sergei Vakulenko, these plans largely appear unrealistic. The American government has almost no tools to significantly boost production within the country. And even if such tools were found, a significant drop in prices would lead to cuts in shale oil production. This leaves only two options: either lower prices or expanded production.

Moreover, under price pressure, Russian producers, with a production cost of $20 per barrel, appear more competitive than American ones. The scenario in which Russian oil is first pushed out of the market and then subjected to a full embargo also seems rather unrealistic.

Most of the key decisions and projects that will impact supply dynamics and prices in the coming years were made long before the recent election. The LNG production capacity coming online in the coming years will indeed create opportunities for pressure. It will enable the US to expand exports to Europe, opening up possibilities for sanctions against Russian LNG projects as well as reducing dependency on Russian pipeline gas in Central Europe. This will happen if there is no political agreement that eases sanctions on Russia.

Overall, Trump has far fewer levers of pressure over Putin than many would like to think. And Trump’s slogan, ‘Drill, baby, drill’, is unlikely to have frightened the Russian president much.

During the US election campaign, energy issues were prominently featured in both Trump’s rhetoric and in speeches by his allies, including a July op-ed in The Wall Street Journal by former Secretary of State Mike Pompeo. Trump's think tank, The America First Policy Institute (AFPI), which is likely to shape the policies of his administration, has also regularly spoken on energy policy. The main elements of his agenda are fairly predictable for a Republican candidate: less emphasis on the ‘green’ and decarbonisation agenda and more focus on business interests, prioritising low costs and economic efficiency.

Under this approach, Trump has promised to issue more permits for oil and gas development on federal lands, lift the ban on drilling in the Alaskan Wildlife Refuge, restart permits for the Keystone XL pipeline from Canada to Oklahoma, and allow the construction of liquefied natural gas (LNG) plants along the Gulf Coast. Additionally, it is planned to significantly ease requirements for automakers, which under Biden had been tightened, forcing companies to sell a certain number of electric vehicles in order to sell traditional cars. Effectively, this requirement compelled manufacturers to subsidise electric vehicle sales by increasing prices on conventional cars.

Moreover, according to Pompeo, oil would become an instrument of foreign policy – Trump would seek an agreement with Saudi Arabia to drive Russia out of the global oil market.

Will this policy lead to radical change in the foreseeable future? Probably not.

In reality, the federal government has limited ability to stimulate oil production within the United States. Unlike most other countries, the US has no specific oil extraction taxes or anything like Russia’s extraction tax. The American government participates in oil revenue through a standard universal income tax, meaning it lacks the flexibility to sacrifice a portion of oil revenue to incentivise producers.

What the government can do is open up new lands for leasing for oil production. Lease rates are relatively low – more like a land-use fee than a fee for resource exploitation. Trump promises to increase the number of available lease areas, but land availability wasn’t an issue under Biden either. American shale production has rebounded, largely compensating for the pandemic drop when oil prices were low. However, this growth is slowing as the most productive areas have already been developed. Extraction from less productive sites with rising operational costs due to post-COVID inflation means higher costs overall.

The project of a pipeline from Canada, which runs through the territories where American shale oil production began (Keystone XL), was abandoned three years ago and is unlikely to be revisited. The centre of US shale production has since shifted to Texas, where there’s already sufficient infrastructure. Furthermore, significant growth in shale production is no longer expected – perhaps another million to one and a half million barrels per day, as long as prices remain above $75 per barrel. However, if prices fall below $60 per barrel, a decline of 1.5 to 2 million barrels per day is expected within two years. Therefore, the idea of lowering gasoline prices for American consumers by increasing US oil production seems somewhat unrealistic: essentially, it is a choice between either low prices or production growth.

The idea of cutting off Russia’s oil revenue by reaching an agreement with Saudi Arabia for a sharp production increase appears equally challenging. According to Pompeo (whom Trump has already stated he will not invite to join his new cabinet), higher production and the resulting price drop would supposedly force Russia to halt production and exit the oil market, leaving Saudi Arabia to enjoy the market – and, presumably, high prices – alone.

However, Russia, with its current extraction and transportation costs below $20 per barrel for most of its production, would not immediately halt production. And even if it did, it could ramp it back up as soon as prices rose. Additionally, this situation would be far more painful for American producers. This is precisely what happened in 2020, when Trump, by threatening to cut off Saudi Arabia’s access to US military supplies, compelled it to negotiate with Russia to organise a coordinated production cut to stabilise the market during the pandemic. Moreover, the next theoretical step in this scheme – a sharp rise in prices meant to lure Saudi Arabia into the plan – would be unpleasant for American consumers. In short, there are too many contradictions in this approach.

Instead of this unworkable price-cap scheme, one theoretical alternative would be to ensure that additional Saudi and increased US production could fully replace Russian oil, and then attempt to impose a complete embargo on Russian oil purchases for all, with threats of secondary sanctions for non-compliance. But in this scenario, the global oil supply balance would still fall short, Russian oil would still be needed, and the price surge resulting from this experiment could push the global economy into a severe crisis.

Lifting Biden’s moratorium on permits for new LNG plants might alter the situation after 2028. This moratorium did not apply to plants already under construction when it was implemented. It is expected that by 2026-2027, new facilities capable of producing several million tons of LNG will be operational; however, their utilisation rate will not exceed 70% in the first few years. Even if the Trump administration manages to authorise some additional LNG plants over the next three years, this would not change much, as LNG production capacity will not be a limiting factor during this period.

The room for manoeuvre here relates to Russian gas. When the new US capacity comes on stream and additional volumes of LNG reach the European market, there will be an opportunity to impose sanctions on Russia’s Yamal LNG project as well as to discontinue Russian pipeline gas currently supplied to Central Europe. This will happen unless political agreements are reached in the meantime to scale back or ease the sanctions conflict with Russia.

In addition to plans for increased American production and a price war with Russia, Trump and his strategists are set on withdrawing from international efforts to limit greenhouse gas emissions and exiting the Paris Agreement. If the US were to eliminate carbon emission fees, American goods exported to Europe would be subject to the CBAM border tax starting in 2026. This scenario could lead to a tariff war between Europe and the US However, considering Trump’s campaign promises to replace income taxes with tariffs, such a trade conflict seems likely in any case.

If the European CBAM mechanism is undermined by US resistance, it will be much harder to enforce on goods from other countries. European manufacturers might also pressure the EU to relax environmental requirements to stay competitive globally.

Curiously, Elon Musk is currently a major donor to Trump’s campaign and a close confidant, even though Trump’s anti-environmental stance seemingly conflicts with the goals and business interests of a manufacturer of electric vehicles, solar panels, and energy storage solutions. How this conflict will be resolved remains unclear, but it is highly likely that Chinese electric car imports to the US would face higher tariffs, which would presumably please Musk.

Predicting how many of these ideas will be implemented and in what form is difficult. Campaign promises are often minimally realised, and this is particularly true with Trump, who is known for making and retracting statements as he sees fit. In his previous term, Trump accomplished little of his agenda due to opposition from Congress and the federal government. This time, however, he holds more sway over the Republican Party and can expect greater support from Congress members. Trump’s team has also reflected on how to make the federal apparatus work for the president, rather than against him.

A moderate increase in US oil production is likely, compared to what might have occurred under Harris, but it won’t be revolutionary. This increase may be absorbed by domestic demand due to a slower-than-anticipated transition to electric vehicles. LNG production and export are set to grow significantly, as will efforts to secure markets for this gas – a trend that would have continued regardless of election outcomes. Expanded export capacity could lead to slight gas price increases in the US, potentially incentivising renewable energy development in some states without further Trump administration intervention. Global efforts to establish carbon trading institutions, reduce emissions, etc., will likely advance without US involvement and perhaps face American opposition, slowing their progress. However, these efforts were already weaker than they were at their peak in 2021.

In the end, some modest changes may take place in the US energy market, but they will have limited impact on the global market. The entry of new LNG production facilities, which will increase US export capacity, will affect global dynamics, but this isn’t linked to Trump’s specific policy proposals. His potential decisions in this area could have effects only well beyond his term. A deal with Saudi Arabia seems unlikely, as it would mean market share losses not only for Russia but also for US producers. Finally, a scenario where Russia is forced off the global oil market via an embargo is technically challenging – replacing all Russian oil quickly is highly improbable.

Thus, Trump’s energy strategy is likely to remain largely a pre-election tactic.