Trump wants oil firms to “drill, baby, drill.” But their investors are in the mood for something else.
“Unleashing American Energy” — that’s the title the White House gave to a new executive order (one of many such orders) on energy policy. One goal is to increase domestic fossil fuel production, particularly oil and gas. The thing is, the U.S. is already producing crude oil at a record level, making us by far the largest oil producer in the world.
And investors in the oil industry aren’t exactly clamoring for a big expansion of domestic production right now.
There was a time when investors wanted to see oil companies invest a lot of money in more production, back in the shale oil and fracking boom of the 2010s.
“There was this attitude and this outlook that if you weren’t expanding drilling, then there was no way you’re going to make any money,” said Ellen R. Wald, a nonresident fellow at the Atlantic Council’s Global Energy Center.
She said this was the case during much of President Trump’s first term.
“And so firms were producing more, even at a loss, mostly because they were getting a lot of investment for that,” Wald said.
Nowadays, investors want something totally different.
Tom Seng at Texas Christian University said ever since oil prices recovered from the pandemic lockdowns, their message to oil companies has been, “we’ve been supporting you for a long time. We want some reward now for doing that, you’re going to pay us dividends and you’re going to do share buybacks, and obviously the formula for doing that is to have net positive cash flow.”
Translation: Don’t spend your money on new drilling projects. Give it to us.
So, the Trump administration can go ahead and ease regulations and permitting requirements and open more federal land to oil and gas exploration, as the executive order promises.
But, said Matt Smith at the analytics firm Kpler, there may not necessarily be a response in production. Oil is just too cheap to justify drilling more wells.
But, he said, all bets are off if oil prices go up.
“That would be the thing that would drive on production, and that would likely be in the shale plays, right? They’re kind of short cycle investments,” Smith said.
Meaning, more drilling in the Permian Basin in West Texas and New Mexico. Not so much in Alaska or offshore.
But, higher prices wouldn’t be ideal for consumers. Right now, Smith said, around $75 dollars a barrel is high enough for producers to expand their output incrementally but low enough to keep prices down at the pump.