Drilling Down on What Trump Can — and Cannot — Do for the Oil Industry

Markets and technologies can enhance or limit power, depending on who’s in charge and how they prioritize their goals

There are limits to power, even for presidents. Market realities are among the biggest of those limits.

President-elect Trump has been very clear that increasing drilling is a top goal. But it’s probably not one he can achieve — massive headwinds are blowing right into the face of the oil industry. 

Drill, baby, drill

“I’m not sure how ‘drill, baby, drill’ translates into policy,” said Exxon CEO Darren Woods on CNBC just before the election. 

He’s not alone. 

Over the last four years, oil drilling reached an all-time high in the U.S. In fact, the United States produced more oil last year than any country ever — more even than Saudi Arabia has ever produced in a single year. Woods said Exxon and the industry at large did not face constraints from “external restrictions” on drilling under President Biden.

President Biden didn’t drive this growth. Markets did. Private companies decide when and where to drill based on economics and prices. 

If President Trump wants to increase drilling beyond its already stratospheric level, he’ll probably have to nationalize the oil industry — it’s one of the very few ways a president’s personal goals can override companies’ rational market decisions. That also would put Trump somewhere to the left of Bernie Sanders. 

Of course, there are some levers a president can pull short of nationalizing the oil industry, such as leasing federal lands for oil production (there is very little of that in Texas), permitting more pipelines, or eliminating the methane emissions fee in the Inflation Reduction Act (IRA) — which, for what it’s worth, Exxon wants to keep in place. 

But if drilling rapidly increases, then oil prices will crater — which, of course, leads to less drilling. Even a nationalized oil company cannot escape market dynamics. 

The breakeven point for new wells in Texas shale plays is $62-$70; oil prices in West Texas have averaged about $70 the last few months — very close to their lowest level in three years.

Supply, meet demand.

Earlier this year, China crossed an important threshold: one out of every two cars sold since September is an electric vehicle. For the last quarter century, China accounted for 50% of oil demand growth, making it the industry’s biggest growth engine by far.

But that growth is declining rapidly as China scales electric vehicles and high speed rail at a pace unthinkable even five years ago. That’s part of the reason that the International Energy Agency revised their global oil demand numbers down, such that they peak in just a few years. 

OPEC, the cartel responsible for most of the world’s oil supply, protested the IEA’s forecasts loudly, then revised their own estimates down each of the last three months. 

In addition, OPEC withheld around six million barrels of oil — a massive amount — and the Saudis are increasingly talking about releasing several million of those. If the floodgates start to open, oil prices will drop. 

If that happens, it will freeze oil production until prices come up, no matter how much the president chants “drill baby drill.”

Here again, market realities trump policy. Don’t take my word for it: here’s Exxon CEO Darren Woods again:

“I think this is true for everyone in industry: we're making decisions to invest based on the returns we think we can generate for our shareholders, the value we think we can contribute. I don't think that's going to change [with a new administration]. And the advantage of the unconventional business today, the business that's in the US predominantly and growing, is the flexibility that the industry has to ramp spending down and ramp down activity to lower production if the market environment would suggest that is needed.”

You get that? If prices drop, the world’s largest companies will drill less until prices go back up. “Drill, baby, drill,” if it could be translated into actual policy, would be terrible for oil investors.

What would real policy support look like?

If the new administration really wants to help oil companies, it would start by supporting cutting-edge, low-carbon industries that American energy companies can lead and profit from: hydrogen, geothermal, carbon removal, and low-emission oil and gas production, for which European and Asian buyers are willing to pay a premium. American producers have lowered emissions in the last several years; anyone concerned about the long-term health of the American oil industry should want that to continue, regardless of what one thinks or believes about climate change.

Our global competitors would love it if the U.S. would ditch the methane fee, drop out of international agreements, scuttle plans for green hydrogen and carbon capture, and otherwise walk away from this lucrative playing field. 

Only American competitiveness would suffer.

The Trump transition team also is making a lot of noise that “unleashed” oil production will counteract the inflationary effects of high tariffs — as if lower oil prices will counteract massive increases in the cost of imported goods. But it would be nearly impossible for oil prices to drop that low. And even if they did, it would be a disaster for the oil and gas industry and new drilling would halt until prices increased to a point where investors can earn returns. 

Trump speaks loudly; he will continue to do so. But markets speak much louder.

Thank you for reading! This is a reader supported publication. To support this newsletter and receive subscriber-only content, please become a paid subscriber today.