Oil Rig
Republican presidential candidate Donald Trump has announced that his primary focus, if reelected, will be to "drill, baby, drill" in order to reduce energy costs. During the Republican National Convention, Trump stated, "Republicans have a plan to bring down prices and bring them down very, very rapidly. By slashing energy costs, we will in turn reduce the cost of transportation, manufacturing, and all household goods."
Economic Implications of Increased Drilling
However, industry experts caution that energy companies might be reluctant to pump more oil if prices fall too low. Samantha Gross, director of the energy security and climate initiative at the Brookings Institution, noted, "You’re not going to produce so much that you decrease the price of your product that much."
A recent Dallas Fed survey indicated that firms require oil prices to be at least $64 per barrel to drill profitably. As of this week, West Texas Intermediate hovered above $77 per barrel, while Brent crude traded just above $81 per barrel. "The lower the price goes, the less US producers will drill or pump as fewer wells will be profitable," commented Rebecca Babin, senior energy trader at CIBC Private Wealth.
After a wave of consolidation, oil companies are prioritizing returning cash to shareholders and maintaining capital discipline. This trend is likely to limit the "drill, baby, drill" approach. "Consolidation will give acquiring companies more influence over US production," Babin added. "The larger companies have been more focused on capital returns and will likely be less influenced by political backdrop."
Policy Changes and Permitting
Trump’s potential influence on energy production would primarily involve easing permitting restrictions for drilling on public land. According to Philip Rossetti, senior fellow for the energy policy program at the R Street Institute, "A look at the drilling permitting process in past years found that in 2016, it took an average of 196 days to review applications for permits. This process was cut by more than half by 2019 during Trump's tenure."
Under the current administration, the royalty rates on federal land drilling have increased by more than one-third to 16.67%. Wall Street anticipates that these royalties and other restrictions could be scaled back if Trump returns to the White House. "You would have immediately much less energy restrictions," said Neal Dingmann, energy research managing director at Truist Securities.
The anticipation of increased production could cause oil prices to fall by 10% to 20%, potentially reaching the $70 or high-$60s per barrel level. Conversely, if the Democrats maintain control, prices could rise above $90 per barrel.
Market Reactions and Future Outlook
Despite the Democratic administration's efforts to reduce reliance on fossil fuels, the US oil industry has achieved record profits and production levels. The S&P 500 Energy Select ETF soared 218% from the start of Biden’s presidency, driven by high oil prices following Russia’s invasion of Ukraine. In contrast, during Trump’s administration, the ETF fell 56% due to decreased demand during the pandemic.
"Yes, Trump has some levers he could pull that could lower costs by increasing production, but those levers are only one component of energy prices that are mostly dictated by global markets," Rossetti stated.
JPMorgan strategists project that Brent crude will average $83 per barrel in 2024, falling to $75 the following year, partly due to decelerating demand growth and increased electric vehicle use. OPEC+ plans to maintain most production cuts into 2025 but will begin a gradual reduction of voluntary cuts starting in October.
Ed Hirs, senior fellow at the University of Houston, expects Trump would negotiate with OPEC nations to boost production. Unlike other oil-producing countries, the US industry is privatized, complicating efforts to influence production levels. "Trump’s intention for lower oil prices to benefit the public will come at the expense of the domestic oil industry," Hirs said. "It's one of those 'be careful what you wish for' scenarios."
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