Forget Trump’s ‘drill, baby, drill’ mantra. The oil giants won’t go for it

The OPEC+ oil cartel meets again this weekend to consider whether to bring back some of its sidelined capacity. Inevitably, you’d think, there will be at least a reference to Donald Trump and his “drill, baby, drill” mantra at the meeting.

The meeting, to be held online, won’t be much different from the oil cartel’s previous meetings this year, where the planned staged return of 2.2 million barrels a day of oil to the market will be debated, and deferred yet again.

OPEC+ has withdrawn more than 6 million barrels of oil a day from the global market since it first tried to put a floor under prices in 2001. The original plan for this year was to bring back 2.2 million barrels a day from October, adding 180,000 barrels a day each month.

Donald Trump wants a massive boost in US oil production to lower US petrol prices. The oil bosses, however, are more interested in boosting shareholder returns.Credit: Bloomberg

Then the start date for the returned production was pushed back to December, and now it seems likely it will be pushed back further, possibly to the end of the first quarter next year.

With oil supply outstripping demand – the International Energy Agency has forecast a surplus of more than a million barrels a day next year – and oil prices currently in the low $US70 ($108) a barrel range, the risks to prices are tilted to the downside. Indeed, Citi and J.P. Morgan analysts see oil prices next year closer to $US60 a barrel than $US70.

Then there’s Trump, who has promised to cut red tape, open up federal lands to fracking, remove the Biden administration’s incentives for cleaner energy production, lift Biden’s freeze on new LNG export terminals and dramatically boost fossil fuel production so that the industry (which was a heavy donor to his campaign) can “drill, baby, drill.”

‘I don’t think we’re going to see anybody in the ‘drill, baby, drill’ mode. I really don’t.’

Exxon Mobile senior executive Liam Mellon

He has appointed fracking enthusiasts to key energy roles, and his newly anointed Treasury Secretary Scott Bessent has outlined his own economic agenda – his “3-3-3” plan – that includes targets of 3 per cent economic growth, a 3 per cent federal deficit and lifting US energy production by the equivalent of an additional 3 million barrels of oil per day.

US oil production is already at record levels of more than 13 million barrels a day. The IEA says the US will produce an average of 13.22 million barrels a day this year and 13.53 million barrels a day next year.

It is the increased output from the US, Canada, Guyana and Brazil that, coinciding with declining demand from China over the past six months, is primarily responsible for the surplus of supply over demand – which has kept a lid on oil prices despite the ongoing wars in Ukraine and the Middle East.

Trump’s ambition for what he calls “liquid gold” is at odds with the industry’s supply and demand settings and potentially with the US energy industry’s ability and willingness to deliver on that ambition.

US oil companies, particularly the larger ones, have had a fabulous four years even though – or perhaps because – the scale of the increase in production during the Biden administration has been less than it was during Trump’s last term or, indeed, during Barack Obama’s presidency.

More credit for the US energy giants’ record cash flows probably goes to Wall Street than Washington, however, with investors pressuring them to be more disciplined with their capital.

Where the shale oil and gas producers used to burn the cash they were generating by continually expanding their drilling programs, they are now showering shareholders with a cash bonanza via dividends and share buybacks.

That’s why ExxonMobil senior executive Liam Mallon flagged this week that US oil and gas producers wouldn’t significantly increase their production in coming years.

“I think a radical change is unlikely because the vast majority, if not everybody, is primarily focused on the economics of what they’re doing,” he told a conference in London.

“If those rules [the restrictions on drilling on federal land] were substantially changed, you would be able to drill more, assuming you have the quality and met your economic threshold. But I don’t think we’re going to see anybody in the ‘drill, baby, drill’ mode. I really don’t.”

Even if the Trump administration’s energy policies were able to encourage more drilling and production, and even if the market was able to absorb the increased volumes without materially affecting oil and gas prices, Trump’s other policies might work against any net gains.

On Tuesday, of course, Trump announced his plan to impose 25 per cent tariffs on Canada and Mexico on “day one” of his new presidency because of their supposed roles in the flow of illegal immigrants and fentanyl into the US.

Between them, Canada and Mexico supply more than 5.2 million barrels of oil a day – about 70 per cent of US crude imports – and about 8.5 billion cubic feet a day of gas to the US market. Their heavier crudes are better suited to US refineries than the lighter crude produced from shale.

Their oil could be diverted elsewhere to avoid the tariffs, or it could be sold into the US at higher prices, with the price premiums paid by US refiners and ultimately consumers. If diverted, the lost supply could theoretically be matched by increased US domestic production, except that they aren’t interchangeable products.

US refiners need the heavier crude and therefore, given that their proximity makes Canada and Mexico their low-cost suppliers, US domestic oil and gasoline prices would probably rise. As usual, Trump’s tariffs are ill-conceived and based on misconceptions of how tariffs work.

Indeed, Trump’s predilection for using tariffs as his weapon of choice on almost any issue, if he does carry through with all the threats he makes – whether it’s trade, illegal immigration or an assault on the structure of government and its agencies in the US – is a recipe for increased US inflation, higher interest rates and decreased growth in the world’s largest economy.

If billionaires Elon Musk and Vivek Ramaswamy, whom Trump has picked to co-lead a new Department of Government Efficiency, were actually able to deliver the $US2 trillion ($3.1 trillion) of cuts to US government spending Musk says is feasible (which appears most unlikely), we’re probably talking about a deep US recession.

Higher US interest rates, relative to what they might otherwise be, and the increased geopolitical tensions that appear to be near-certain accompaniments to the incoming administration aren’t going to boost global oil demand.

Trump’s threat of baseline tariffs of 10 to 20 per cent on all imports to the US and a 60 per cent tariff on all imports from China – whether it’s a negotiating bluff or real – will impact China and Europe’s growth rates and global energy demand.

Why would the increasingly economically rational US producers and OPEC+ boost supply into a market that is experiencing a supply glut even before Trump takes office with policies that would, if successful, materially increase supply as his rekindled trade wars further depress domestic and global demand?

Unless they are prepared to behave irrationally, they wouldn’t.

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