President Trump’s stated energy policy objectives are inherently contradictory and highly impactful.

He has said he wants to reduce American energy costs by 50% and raise tariffs globally. He’s also vowed to bring Iran to its knees, targeting a reduction in Iranian oil exports by 500, 000 b/d by the end of the second quarter. His team has indicated that this could escalate to a drop of 1 million b/d by the beginning of Q4 if no agreements are reached on various matters. Add to this the complexities of Russia-Ukraine dynamics, border issues with Canada and Mexico, and proposed tariff increases, and it becomes difficult to envision how such goals coexist. Fighting Iran while aiming to reduce costs for American citizens creates a volatile environment for the year ahead.

What impact would restrictions on Iranian oil have on the market given ample global supply?

Let’s consider the scenario of an OPEC+ response to US sanctions on Iran. If Iranian exports drop by 1 million b/d, does OPEC+ rush to fill that gap or do they proceed cautiously, concerned about market volatility and Trump’s ultimate game plan? Leaders in OPEC+ may prioritize maintaining price stability, possibly within a band of $70–$95 per barrel for Brent. Replacing one million barrels per day overnight is risky and may incite rebellion among member nations hesitant to remove production once reinstated. The response will depend heavily on the geopolitical landscape.

Can OPEC+ continue managing volumes even as some members ramp up capacity?

The group faces increasing difficulties in maintaining cohesion due to differences in fiscal breakeven prices and economic priorities. The UAE, for example, has diversified its economy remarkably well. Other countries, like Saudi Arabia, face higher fiscal breakeven prices, potentially well above $100. Historically, Saudi Arabia has used price manipulation to discipline overproducing members or competitors like Russia and the US. However, this approach often backfires, as seen with the shale revolution in the US and Russia’s ability to adapt to a fluctuating ruble. Adding to this complexity, OPEC’s share of global production has not kept pace with overall market growth. In 1980, OPEC’s 24 million b/d accounted for a significant portion of the global 60 million b/d market. Today, OPEC’s output remains the same, but the global market exceeds 105 million b/d. Their leverage is diminishing.

How significant is China’s transition to a service-oriented economy for oil markets?

Demand for fossil fuels, especially oil, has likely peaked in China. While natural gas may still grow, oil intensity relative to GDP has sharply declined. This mirrors trends in the US, Europe, and Japan, where peak demand was reached years ago. Global oil demand growth is slowing significantly. For every 1% increase in GDP, oil demand now rises by just 0.3%, and this ratio continues to decline due to the Energy Transition. For OPEC+ and other producers, this structural shift presents a formidable challenge.