What’s Vladimir Putin getting for the effort he put into electing Donald Trump?
It’s hiding — $80 billion a year’s worth — in plain sight in yesterday’s Federal Register, but no one in the media has caught on. That’s the annual value to Putin of the higher price premium the Trump Administration has built up for crude oil over the past year.
In the face of economic logic, the desires of the American auto industry, and the legal opinion of the new EPA Administrator, Andrew Wheeler, the Trump Administration proposes to freeze progress in future US auto emission standards and technology. The Administration is also provoking a multi-year legal log jam by challenging the right of California and its partner states to protect their citizens from greater pollution, climate disruption and soaring fuel bills — a legal battle it is almost certainly going to lose. But Trump will have done everything he can to make driving more expensive for Americans and the US economy. He wants his friend in Moscow to feel that Trump has his back.
The emissions and fuel economy roll-backs are the latest step in the President’s transparent strategy which will reward Putin with a Russian-economy-boosting future of ever higher oil prices. Rolling back emission and fuel economy standards is going to increase US oil consumption by at least a half million barrels a day by 2030, an amount that climbs as high as 800,000 barrels a day by 2035. If oil costs $80 a barrel in 2035, that alone would increase the US petroleum trade deficit by $23 billion a year from increased fuel consumption alone — in effect a hefty tax on American drivers and the American economy paid to Russia and its OPEC partners.
But the emissions standards and fuel economy rules are only Trump’s latest gift to Putin’s petro-state. By withdrawing the US from the nuclear agreement with Iran, and restoring US sanctions on Tehran, Trump may have pulled several million barrels of oil production off the world market long term. Trump’s escalating tariff wars have begun to cripple the ability of US shale producers to ramp up production, further tightening global oil markets.
Putin likes having Iran as an ally to disrupt the Middle East. But a crippled, sanctioned Iranian ally is the most convenient for him. Less Iranian oil means higher prices for Russian crude, and an Iran that is that much more dependent on Russian support. Putin doesn’t have to take the heat for crippling a major oil producing competitor of Russia’s — he can blame the US.
All in all, Trump’s move so far appears to have tightened the future oil market by almost 3 million barrels a day. That’s almost twice as much of a shift in the oil supply-demand equation as the effort Saudi Arabia and Russia were able to mount over the past several years by restraining production. How big a deal is this to Putin? Well, Russia and the Saudis, by shifting tightening the market by 1.8 mbd, were able to double the price, from $40-$80/barrel. Even over a longer time horizon, 3 mbd in increased demand and decreased production should be enough to juice up oil prices by $20/barrel. That would cost the US economy $125 billion a year. Russia reaps 2/3 of that amount. That’s quite a pay-off for the investment Putin made in the 2016 election, whether or not Trump has a clue what he is doing.
Congressional Republican defenders of the Administration’s obsequious stance towards Russia like to claim that the Administration is being really tough with Russia, imposing new layers of sanctions (which Congress, not Trump, mandated). But that’s purely a distraction. Trump (and the Republicans in Congress) understand what real sanctions look like — they are what we imposed on Korea and have now reimposed on Iran. Real sanctions don’t leave their targets free to profit massively from manipulating global oil markets — real sanctions take their targets out of those oil markets. Temporarily losing a few buildings and expelling a few diplomats? Pure head-fake.
Putin must be chuckling all the way to the oil futures market as he watches the Trump assault on America’s best hope to free itself from dependence on Russian oil — with the ancillary benefit of the uncertainty over future auto technology crippling the US car makers.
That’s the real payoff from the Manchurian President.