Prices dictate energy supply trends far more than policy

On the afternoon of March 28, President Donald Trump strode into the headquarters of the Environmental Protection Agency and declared the war on coal over.

“You’re going back to work,” he told a group of coal miners as he signed a highly-anticipated executive order which launched the lengthy process of rolling back much of the Obama administration regulatory efforts to combat climate change.

{mosads}The order, which the Trump administration dubbed the “Energy Independence Executive Order”, will allow U.S. energy production to flourish, for U.S. producers to finally free themselves of the shackles of government regulation, Trump said.

“We will unlock job-producing natural gas, oil and shale energy,” Trump told his supporters. “We will produce American coal to power American industry.”

Trump’s claims, however, had little impact on energy markets. Analysts claim it remains unclear if the executive order will ever impact supply and demand fundamentals, at least in the way the current administration envisions.

Since it was signed Tuesday, and even as details of it began trickling out days before, the order’s had no noticeable impact on coal, natural gas or crude oil prices. Analysts believe that the order will likely have no near term impact on domestic fossil fuel supply and much of the order attempts to rollback regulations already being unwound in courts.

Kevin Book, a managing director of ClearView Energy Partners, said Trump’s order may exacerbate an imbalance between supply and demand, since many of the regulatory limits on U.S. supply will be removed, but demand will remain inelastic.

“Ironically, it may mean more energy, but it may mean that not every energy company benefits,” Book said Tuesday. “There is an intermediate term risk of deregulating supply faster than demand. Some operators will do well… but for the market as a whole, it may not be good.”

While the Trump administration has indicated it wants to weaken U.S. fuel economy standards, the demand impact of such a move would still be at least a decade away, Book said.

As its title makes clear, the order is aimed at achieving U.S. energy independence, a platitude every U.S. president since Richard Nixon has spoken of as a policy goal. But, many view the idea of American energy independence as unrealistic and impractical in the current, global energy market.

The concept in Washington think tank and academic circles has shifted more to the concept of energy security, rather than independence. This shift in thinking is occurring as the chasm between U.S. politics and market realities may be growing ever wider.

For example, as the Obama administration was putting its climate agenda into place, U.S. oil production surged by nearly 4.5 million barrels a day, showing that prices, not policy, dictate major supply trends.

In last year’s U.S. presidential race, Trump was clearly the “pro” fossil fuels candidate, as his opponent, former Secretary of State Hillary Clinton was expected to intensify Obama’s climate change agenda and place new limits on production on federal lands and in federal waters.

But, the price of Central Appalachia rail (CSX) thermal coal for next-month delivery on Nov. 8, the date of the U.S. presidential election, was $62.95 per short ton. The following day, it fell 25 cents, illustrating the disconnect between policy and pricing.

The CSX price bottomed in late May 2016, when it fell to an all-time low of $33.30 short ton on May 31. In the months since, driven partly by European demand, the CSX price rallied to a high of $64.50 short ton, ironically, on Nov. 7.

On Tuesday, after Trump’s executive order, S&P Global Platts assessed the CSX price at $52.70 per short ton, down 15 cents from Monday. Overall U.S. coal production in 2016 totaled roughly 739 million short tons in 2016, down 17.5 percent from 2015 and the lowest annual total since 1978.

While coal has taken a beating in recent years, it’s not going away anytime soon. But it’s also not likely to grow, say analysts, given competition from natural gas as well as renewables such as wind and solar.

Trump’s order, perhaps most notably for the coal sector, calls for a review of the Clean Power Plan, the cornerstone of the Obama administration’s climate agenda, the first step in the anticipated repeal of the rule which sought to cut carbon emissions from existing power plants by 32 percent from 2005 levels by 2030.

The repeal process, however, will require a lengthy rulemaking process and will likely face legal challenges from environmentalists and others. Richard Revesz, director of the Institute for Policy Integrity at NYU School of Law, said the issue may not be resolved before the 2020 presidential election.

Brian Scheid is the senior editor of Oil News at S&P Global Platts. Andrew Moore is the managing editor of Platts Coal Trader at S&P Global Platts. 

The views expressed by contributors are their own and not the views of The Hill.