By Tim Daiss
You have to hand it to President Trump. He’s increasingly becoming the most indecisive president in U.S. history. His apparent and abrupt about-face on Sunday to increase tariffs on Chinese goods less than a week after claiming that trade talks were going well have caused global financial markets to convulse – sending both equities and global oil prices south.
However, the biggest concern for oil markets is the hit to economic growth and hence oil demand that will follow an uptick in tariffs on Chinese goods. Initial tariffs put in place last year on some $200 billion worth of Chinese goods had already caused economic stagnation globally, which also hurts global oil demand. Now that Trump has decided to increase tariffs on $200 billion worth of Chinese goods from 10 percent to a staggering 25 percent with another $300 billion possibly slated to be hit, the outcome for economic growth could be grim.
This puts major oil producers and exporters like Russia and Saudi Arabia in the crosshairs of any economic downturn. Just as the Saudi-led OPEC+ group of producers had come close to restoring global oil market equilibrium, with over a 30 percent increase in oil prices so far this year, fresh U.S. tariffs on China will cause Riyadh to have to change its oil production strategy once again in less than a year, and its due to Trump’s actions. Last fall, Saudi Arabia bowed to Trump pressure via Twitter to trim production and keep a lid on oil prices but was caught flatfooted when Trump unexpectedly announced in November his 180-day Iranian oil sanctions waiver for eight major importers of Iranian oil, including China, Indian and Japan. The decision, made without consulting with his Saudi allies, caused a rift in U.S.-Saudi relations and damaged Trump’s otherwise stellar relations with the royal family.
Since then, the kingdom has been reticent to move on further Trump Tweets over oil production. However, that started to change when Trump, again unexpectedly, announced two weeks ago that he would not extend the 180-day Iranian oil waivers, all the while hedging that Saudi Arabia and OPEC would make up the difference by increasing oil production. Riyadh didn’t immediately agree that it would make up the shortfall for the loss of more Iranian barrels from the market, but it also indicated it would likely cover the loss in time.
Now Trump has presented the Saudis and other major oil producers with another quandary to grapple with – a weakened global economy that will ensue due to new sanction. Oil prices will trend downward again, well past the Saudi fiscal break-even point which is reportedly around the $70s per barrel mark, and cause the kingdom to nervously watch its coffers, hoping to not see a repeat of early 2016 when global oil prices dipped below the economically damaging $30 per barrel price point.
The Saudis are finding themselves increasingly formulating new oil production policy due to both overt Trump intervention in global oil markets as well as his other policies that hit global oil demand. While Riyadh is careful to adhere to its line of good relations with Washington, behind closed doors they must be exasperated with this American president, his ability to often and quickly change course and his use of Twitter as a presidential bull pulpit.
Trump’s increased tariffs on China may at the end of the day be warranted since Beijing was reportedly backpedaling from previous agreements it had made in ongoing trade talks with Washington, yet the collateral damage from a full-blown trade war between the world’s two largest economies could be cataclysmic.