Falling oil prices could backfire on Trump’s promise to create jobs | RJO Futures

March 10, 2017 9:27AM CST

Producers won't hire more workers if they can't cover their costs. A budget proposal from President Trump is expected on March 13, but something interesting has happened in the oil sector that may make him a little uneasy. Over the past few days, oil prices have tumbled. West Texas Intermediate crude has fallen about 7%, and ETFs that track the commodity have declined as well. The United States Oil Fund(USO) and the iPath S&P GSCI Crude Oil Total Return ETN (OIL) are down, while the ProShares Ultra DJ-UBS Crude Oil (UCO) has fallen twice as much as those two. This is where the real risk for oil prices kicks in.  The main objective of the Trump administration is to increase the number of jobs for Americans, and the President sees an opportunity to do that in the oil space. He's talked about deregulating the energy industry, among others, but one thing is certain: oil producers can add jobs only if prices are high enough to cover expenses. With the recent decline in oil prices, that prospect is getting harder. 


Interestingly, the reason for oil's decrease is largely because U.S. stockpiles of oil increased massively, but at the same time, the U.S. is importing 4.71 million barrels a day. Notwithstanding the political ramifications, why would the United States continue to import oil as aggressively as it has if it causes prices to fall? There are contracts in place, of course, so the spigot can't be turned off immediately. But if oil prices were higher, producers would be freer to add new jobs, ramp up production, dilute the need for imported oil, and enable the U.S. to be a net exporter of oil. Expect President Trump to discuss reducing dependence on imported oil sometime soon. That would lower the build-up in U.S. stockpiles.

 

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