At the Republican national convention in July, Donald Trump pledged to cut gas prices by boosting domestic oil production. “We will drill, baby, drill,” he declared.
Despite the president-elect’s promise, oil and gas companies probably have other ideas. For the past few years, US energy producers have focused on keeping costs down to stay profitable, balancing between producing enough oil to satisfy global energy needs and paying shareholders big dividends, according to energy experts. That’s unlikely to change soon.
“We see no change to the intermediate term drilling path for oil set by the fundamentals,” Lloyd Byrne, equity analyst at Jefferies, said in a recent research report.
Darren Woods, CEO of ExxonMobil, the largest US oil and gas company, is also skeptical of Trump’s plan. “I’m not sure how ‘drill, baby, drill’ translates into policy,” he told CNBC after its latest results. Separately, at the UN’s Cop29 climate summit in Azerbaijan this week, Woods also urged the incoming administration to not pull out of the Paris climate agreement.
For the past six years, the US has been the world’s largest producer of oil and natural gas, according to the Department of Energy’s Energy Information Administration, and produces about 13.4m barrels a day – a figure that will grow even without new wells on federal lands.
US oil and gas companies have excess capacity as they have restricted production to their most efficient and productive wells. Inflation in the oil patch is cooling, so the combination of lower costs and higher efficiency equals increased profits for oil companies, even as crude-oil prices stay flat, said Peter McNally, an analyst at Third Bridge, a research firm.
Recent consolidation in the industry, with oil majors buying small shale-oil companies, has put the remaining companies operating onshore production in a strong financial position.
All-in costs for an oil company whose production is most leveraged to crude oil prices is about $34 a barrel, McNally says – far below the current $68 a barrel price for Nymex West Texas Intermediate crude-oil futures. The forward curve for crude oil futures prices suggest values will stay steady for at least the next year.
“Nobody’s got crazy plans to be drilling at accelerated rates,” he said. “The futures curve doesn’t exactly inspire your typical oil producer in west Texas or Oklahoma to do it.”
Minding costs is an about-face for how energy companies acted in the early 2000s, when they were criticized for pumping so much oil that they were losing money on each barrel extracted.
When hydraulic fracturing, or fracking, unlocked US shale oil reserves in the early 2000s, US energy producers went on a production spree, outspending their free cashflow and needing to raise money in the capital markets. In the 2010s, the Organization of Petroleum Exporting Countries (Opec) flooded the global market with oil, sending petroleum prices as low as about $26 a barrel in 2016 and causing some US producers to go bankrupt.
Since the pandemic, energy company executives began belt-tightening, rather than trying to increase production. It amounted to a sea-change in how they ran their companies, according to Rob Thummel, senior portfolio manager at Tortoise Capital Advisors.
“For maybe the first time in my couple decades studying the sector, they started to generate free cashflow,” said Thummel. “And that made a lot of sense, because they didn’t need to be investing a lot. Global energy demand was still growing, but not by as much.”
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Tortoise Capital Advisors forecasts that oil production for 2025 could increase by about 500,000 barrels from current levels if companies stay disciplined.
Even if oil producers flooded the domestic market with crude oil, there’s only so much shale-oil refiners can process into gasoline. Refinery capacity is limited: some have closed and others were retooled into renewable-diesel facilities.
There are also technical specifications for how much US shale oil gasoline refiners can accept, as refiners blend different types of crude oil. Before shale oil became so abundant, refiners had invested heavily to refine mostly the heavier oils the US imports from Canada and a few other countries, rather than to refine the lighter shale oil, Thummel noted.
Refiners can adjust their blends somewhat to accept more shale oil, but changing their facilities to increase US shale oil use will require considerable capital investment.
That could increase gasoline prices, Thummel suggested, as refiners would seek to recoup those costs.
“The refiners are optimizing their use of light sweet crude oil,” he said. “But in reality … a lot of the continued increase in production is going to need to be exported.”
