Last week, President Donald Trump submitted his budget to Congress. It’s the starting point in the spending process; in the end, the budget will be changed. But there’s a good chance some of the president’s budget will become policy.
Overall, Trump plans to spend about $4.1 trillion next year. This is just $32 billion more than this year’s spending. The deficit is expected to be about $440 billion, down from an expected shortfall of $603 billion this year.
Details of the budget are the subject of thousands of headlines. Many protest a cut to some program. Some decry tax relief for the wrong group. The headlines demonstrate the reality that change leaves winners and losers.
The news seems to indicate that almost everyone loses under the proposal. The first draft recommends a 2.9% cut in nondefense discretionary spending compared to this year, while an 8.2% increase in defense spending is proposed. Entitlement spending is targeted for a 1.5% cut.
Deep cuts to any program are unlikely. As President Ronald Reagan said: “No government ever voluntarily reduces itself in size. Government programs, once launched, never disappear. Actually, a government bureau is the nearest thing to eternal life we’ll ever see on this earth!”
Every policy change creates winners and losers. When looking for potential winners in the budget, we need to look beyond the headlines. And this year, the biggest winner might just be the American consumer for once.
Winners and Losers
Trump’s budget includes plans to sell half of the nation’s Strategic Petroleum Reserve (SPR) and expand drilling in the Arctic National Wildlife Refuge.
The SPR was set up in 1975 after OPEC cut off oil in 1973 and 1974. Its continued existence proves Reagan was right. Over the past 42 years, American dependence on OPEC has mostly been eliminated.
Canada is now the leading supplier of oil to the U.S., sending us an average of 4.2 million barrels a day. As a group, OPEC supplies an average of 3.5 million barrels a day. The proposed Keystone pipeline, by itself, could replace a quarter of OPEC imports.
The SPR drawdown is consistent with current law, which requires keeping 90 days of imports on hand. Because of increased U.S. production, imports are down. The reserve currently holds 141 days’ worth of imports — 56% more than needed.
Selling oil from the reserves is expected to raise $16.6 billion that can be used to reduce the federal deficit. That’s not much to pay down a $20 trillion national debt … but every little bit helps.
Trump also proposed allowing drilling in the Arctic National Wildlife Refuge in northern Alaska. The U.S. Geological Survey estimates that the area may hold 10.4 billion barrels of oil. This could meet nearly six years’ worth of U.S. consumption.
These proposals benefit American energy companies by allowing them access to U.S. oil reserves. In the long run, that benefits U.S. consumers. Consumers also win as the SPR is reduced to where it should be since large sales will prevent oil prices from rising significantly.
As the budget debates continue, the focus is likely to be on avoiding losses — no one wants a favorite program cut. Winners will be hidden in the process. If the president’s proposal to sell off excess reserves and open American lands to drilling survives the process, the biggest winner is the U.S. consumer.
Regards,
Michael Carr, CMT
Editor, Peak Velocity Trader
