Energy independence has been a focus President Donald Trump’s second term in office. He has gone so far as to declare a National Energy Emergency. However, while promises of deregulation and the removal of export controls were initially greeted with enthusiasm, that optimism has since tempered into cautious pragmatism. Increasing production to drive prices lower may be good for inflation data, but oil and gas companies must operate above their breakeven price to maintain profitability. Said simply, satisfying campaign promises to consumers and making it easy for oil executives to do business are objectives that aren’t easily reconciled.
The Crossroads of Energy Policy and Business
One of the defining features of Trump’s energy policy is his commitment to energy dominance and decreasing our country’s reliance on foreign energy means we need to drill baby drill! This means increasing domestic oil and gas production, rolling back regulations that were perceived to inhibit fossil fuel extraction, and positioning the U.S. as a global energy powerhouse. Key to this strategy is the promotion of the U.S. shale industry, which has revolutionized domestic energy production over the past decade. The U.S. has surpassed Russia and Saudi Arabia to become the world’s largest producer of crude oil. But further increasing energy production may be a tough pill for oil executives to swallow. An increase in production puts pressure on prices and puts pressure on existing oil infrastructure. Drilling a new shale well is not a huge cost in and of itself, but increasing production above current record levels may necessitate spending on transportation or storage systems – programs that require more up front investment with a longer payback timeline.
Perhaps more important, not everything the administration has done so far has actually streamlined the process for oil companies to invest and drill. While President Trump has been vocal about encouraging energy policy, the Department of Government Efficiency’s cuts to the Bureau of Land Management and Energy Department has slowed the process for attaining export licenses and permits.
Furthermore, Trump’s broader economic policies – specifically his tariffs on steel and aluminum – have had a significant impact on U.S. oil and natural gas production. These tariffs directly increase costs for producers, particularly in the construction of drilling rigs and pipelines. Steel pipe prices in particular are a significant line item in the construction of new oil and gas wells. Uncertainty around steel pricing invariably pushes the cost of production higher as it makes it more difficult for the engineering teams to accurately estimate future expenses. This in turn slows down expansion plans, especially in the offshore drilling sector, which requires heavy infrastructure investment.
Tariff uncertainty is also affecting the downstream U.S. oil and gas industry, particularly companies reliant on specific imported oil types. Decades of investment in transportation infrastructure and refineries designed for certain crude grades make continued imports essential, despite rising domestic production. As a result, much of the oil drilled in the U.S. is exported, while a significant portion of refined oil is imported.
Canada plays a crucial role in this dynamic, supplying 98% of its crude exports to the U.S., accounting for nearly 60% of U.S. oil imports. Alberta’s oil sands hold one of the world’s largest reserves, and their thick, heavy crude is a key input for Midwest refineries. Any tariffs on Canadian oil would likely be passed on to U.S. consumers, as these refineries do not have many other potential suppliers.
Energizing The US Shale Revolution
Horizontal drilling technologies have unlocked previously inaccessible reserves of oil and natural gas, particularly in the Permian Basin, which alone accounts for over four million barrels per day of oil production. This surge in production has made the…
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