Drill Baby Drill: Just Not in the United States
The Trump Administration Looks Overseas for Energy Supply Growth, Will it Work?
Introduction
The US Shale revolution has been the most important story in world hydrocarbon production in the history of mankind. Shale oil or “tight” oil production has provided low-cost energy to billions of people across the world and has been the leading cause of the bear market in the Oil and Gas industry since production began to ramp in the early 2010s. From 2010 to 2014 production rose from 1M boe/d to nearly 5M boe/d and by the year end 2024 did just shy of 9M boe/d vs just 800K boe/d in 2008, growth that is nearly unquantifiable in its impact on the world.
It was in no one models, and President Trumps first term in 2016 begin in the golden years of US tight oil supply growth. With energy prices near cyclical bottoms with no end in sight, inflation being largely forgotten and a time of relative peace Trump inherited a nearly perfect era to run the country.
Trumps 2024 term is shaping up to be significantly more challenging. The world is more volatile from a geopolitical risk point of view, inflation expectations exist again after 40 years of interest rates moving in one direction alongside the rate of inflation itself being essentially 0% since the Global Financial Crisis, and the energy markets remain challenging to manage. Trumps “Drill Baby Drill” campaign slogan is really at the forefront of his overall economic aspirations laid out during the campaign trail. Trumps basic energy policy is to unleash American domestic oil supply by ramping production of energy in all forms with a $50 West Texas Intermediate (WTI) price or lower being what we believe to be his aim.
The trouble that Trump has run into is the shale growth, which accounts for 100%+ of all non-OPEC oil supply has ceased growing. In part, it is due to new onshore production in the US needing at a minimum $65 WTI pricing to make new wells drilled economic, which we do not believe was on Trumps radar however, US E&Ps will not bankrupt themselves and the government is not going to drill these wells so, what will Trump and Chris Wright do as a response?
As Trump confronts economic and geologic realities of US Shale supply constraints, he has begun to shift his focus to foreign countries in an attempt to flood the oil market with cheap supply. We think Trump is leveraging the Saudis and Russia to save the promise of cheap energy for the United States. The question becomes, can Russia and the House of Saud save the day? We would fade that belief. In this piece we are going to explain to you why Trumps “offshoring” of new supply growth is folly, and why it might just work against him in the long run.
Our in-house view since it appeared Trump would reclaim power in 2024 was that his policy of drill baby drill might be the final catalyst needed to show the world just how hard it is in the current environment to add meaningful supply to world oil markets. In turns out that under investing in a depleting asset base for a decade has its downsides. As it stands, the world is underinvesting in sustaining capex by nearly $1.5B per day. Can Trump use his seemingly “legendary” negotiating tactics to work the world and the non-OPEC supply base into a state of surplus, or will making deals with foreign, adversarial supply bases only exacerbate the energy problem further? We would bet the latter. Let me explain how.
Russia