Publications: Notes at the Margin

Protectionism: Commodities Lose; China's Economic Action: No Help for Oil (November 11, 2024)

 

Donald Trump’s election as the United States’ forty-seventh president has pleased everyone in the energy sector save those hoping to address global warming. The individuals and firms celebrating Trump’s promises to reduce regulation and increase US oil production should “have been careful what they wished for,” though, because the President-elect also plans to implement an aggressive worldwide trade war.

 

This war will likely proceed even though liberal and conservative economists alike warn that such actions generally depress economic growth. We do not debate that argument here. We focus our review instead on the post-World War I and II and Great Depression trade battles that illustrate how commodity producers end up losers. If history repeats, President Trump may be touting the return of $1 per gallon gasoline within two years. While some economic sectors could benefit from US tariffs, the oil sector will suffer.

 

A recent policy decision in China adds to the trade-war economic risk for commodity markets. On Friday, the country announced a $1.4 trillion stimulus plan, authorizing local governments to refinance crushing debts that have left some unable to pay bills. Those authorities no doubt welcomed the news, especially the ones saddled with thousands of unfinished apartments.

 

By focusing on debt relief, China’s action offers nothing to cash-strapped consumers and ignores the many economists who believe the country needs to push hard to boost consumption. The consequence of not doing so will be greater deflation, slower growth, and perhaps even stagnation. China’s oil use will not increase.

 

The coming trade war’s economic effects, combined with China’s looming stagnation and the surge in non-OPEC production, will force the oil-exporting nations seeking to stabilize prices to cut output further to avoid precipitous declines. If they do nothing, crude could drop below $10 per barrel.

 

To receive the full report along with future issues of Notes at the Margin, please Contact Us or send us an Information Request for subscription information.