There is a warning for those desiring higher oil prices that goes back to Aesop’s “The Herdsman and the Lost Bull” fable: “Be careful what you wish for; your wish may be granted.” High oil prices will likely strengthen the dollar, with the feedback from this forcing many nations with dollar-denominated debt to adopt austerity measures as they attempt to negotiate loans from the World Bank. The austerity moves will depress energy consumption in these nations, with oil use dropping quickly. At the same time, rising prices will prompt greater investment in oil (and natural gas) exploration by private firms outside of Opec. The increase could be particularly noticeable in the US, with firms no longer constrained by the Environmental Protection Agency pushing to maximize output. A significant surplus will develop. Only aggressive action by key Opec-plus members will keep prices from falling.
The US Energy Information Administration publishes a blog titled “Today in Energy.” Most of these posts pass unnoticed. However, the Jun. 26 headline, “US energy production exceeded consumption by [a] record amount in 2023,” should have gotten everyone’s attention. The report began by saying: In 2023, energy production in the US rose 4% to nearly 103 quadrillion British thermal units (quads), a record. Energy consumption in the US fell 1% to 94 quads during the same period. Production exceeded consumption by 9 quads, more than at any other time in our records, which date to 1949.
The commentary explained that the increased US output was “driven largely by growth in the production of natural gas and crude oil in 2023.” (The report also observed that US energy consumption declined slightly in 2023, with oil and natural gas use remaining unchanged.)
The EIA report did not discuss the energy trade balance. However, the data released showed a surge in the US energy trade balance measured in dollar terms. That balance is likely to rise sharply in the coming years, given the US transition to renewables and electric vehicles (EVs), recent Supreme Court decisions and Donald Trump’s probable election. Oil-exporting countries, particularly Middle Eastern nations, confront a major dilemma in their quest for higher oil prices.
In 2019, Donald Trump trumpeted the US’ transformation into an energy-exporting country during his presidency. Unlike many of his statements, his boast was not a lie. The expansion of US exports has continued under President Joe Biden. However, Biden’s pause on approving new LNG export facilities and tougher enforcement of environmental regulations have slowed the growth of energy production and exports.
The situation will probably reverse in the coming years after Supreme Court rulings restrict the power of administrative agencies such as the Environmental Protection Agency. Should Donald Trump be reelected, the LNG facilities will likely go forward, and the Environmental Protection Agency’s environmental protections will be relaxed or eliminated.
At the same time, US fossil fuel consumption will slow. Gasoline use is particularly vulnerable because EVs, while hated by Trump, offer consumer savings. Although EV sales have fallen off in recent months, their popularity will increase, especially as prices decrease, more charging facilities become available and more homeowners adopt another popular source of energy savings: home electricity generation from solar power.
US fossil fuel exports will grow as oil and gas production rises and consumption drops, as will the positive US energy trade balance. Today, the surplus is closely tied to oil prices. Rising prices lift export revenues and motivate producers to boost production, contributing to even greater exports in future months.
Dollar Exchange Rate
The reversal of the US energy trade balance has a direct impact on the dollar’s exchange rate. Historically, the dollar’s exchange rate and oil prices have been negatively related. The Federal Reserve Bank of New York studied the issue in 2019. It said: “Oil prices and the exchange rate of the US dollar against the euro have often moved together over the past decade or so, but it is not at all clear why they should. The standard interpretation of oil price movements as a response to global oil supply and demand shifts makes it unlikely that the correlation stems from the dollar’s effect on oil prices. In addition, the notorious difficulty in predicting currency moves makes it hard to believe that oil prices dictate the dollar’s value. Improbability aside, however, in this blog post we document the tendency for the value of the dollar to rise relative to European currencies when oil prices fall, and we consider a…
Read More: The Dollar and Oil Prices