March has brought two different but intertwined market-related surprises to the presidential race. The equities market fell precipitously from its highs, largely due to Coronavirus fears. The other surprise was the even more rapid drop in the price of oil. At one point, during the night of Sunday March 8, international exchanges for oil saw the prices fall over 30%, again caused in part by Coronavirus fears and also a disagreement between two of the world’s biggest producers.
The big question in American politics is: How will the jolts to the markets impact the presidential election? This column primarily examines issues of energy and energy markets, so let’s stick to the fall in oil prices.
Such low oil prices (with the American benchmark, WTI, in the range of the low $30’s) makes the use of hydraulic fracking to access shale oil in America unprofitable. If these prices persist, it is only a matter of time before some producers need to raise more money, sell their businesses or file for bankruptcy. There would be layoffs. American oil production, which is currently at record highs, would decrease.
It seems like this could be terrible for President Donald Trump’s chances of reelection. But it probably would not be that bad for the president. Here are three reasons why:
- Who else will the oil industry vote for? From the oil CEO’s to the welders to the financiers, those who make their living in a robust American oil and natural gas industry have reason to Trump over Vice President Joe Biden or Senator Bernie Sanders. Both Biden and Sanders support the Green New Deal, which would devastate the American oil and gas industries. Sanders has actually called for prosecuting oil executives, though the alleged crime is unclear. In comparison, Trump has lowered regulations and promoted drilling. Even if times are tough for a few months because of Coronavirus and an oil price war in Asia, the industry has no reason to support candidates who oppose its very existence.
- A side effect of the low crude oil prices is low gas prices. Even if Americans are losing value in their retirement plans, with low oil prices they will be saving money at the pump. Saving at the pump is a tangible and noticeable difference. It is something that impacts Americans positively at the moment. It would be a huge psychological boost for Americans to see gas prices below $2.00, and in some states this is becoming reality. In fact, President Trump tweeted on Monday, “Good for the consumer, gasoline prices coming down!” Moreover, the struggling travel and transportation industries—airlines primarily but also cruise lines—will benefit from low fuel prices. It is true that the American economy suffers when oil prices are too low, but don’t underestimate the psychological and economic benefit of cheap gas.
- The oil is still in the ground. There will be consolidation and renewal and healthier companies will take over and provide new opportunities, probably just in time for the November election. These market crashes happened early enough that they will could recover in time for Trump to go into the autumn debates touting the recovery (and blame the fall on a virus, an act of God). Shale businesses that falter will rise again in new forms. Consolidation and even bankruptcies offer some efficiency to the industry. After all, it was the low oil price era of 2015 and 2016 that led to the lower costs of production and healthier companies and eventually to record American production today. The same will happen if some companies falter in 2020.