Source : THE AGE NEWS
There is a fundamental contradiction in the Trump administration’s energy policy. It wants a boom in US oil production but it also wants lower prices. There’s conflict between those ambitions.
That tension between the desire to pump more oil and also have lower prices shows up in the Organisation of the Petroleum Exporting Countries’ (OPEC) latest monthly assessment of the outlook for the oil market, issued on Wednesday.
Donald Trump’s energy policy is a key plank of his economic strategy.Credit: AP
It is projecting an increase of 800,000 barrels a day in non-OPEC+ supply for both this year and next, reducing its forecasts of a month ago by 100,000 barrels a day for each year. US production is expected to rise by 130,000 barrels a day this year – about 100,000 barrels less than OPEC was forecasting last month – but by only 44,000 barrels a day in 2026.
Non-OPEC+ investment on exploration and production is expected to fall by 5 per cent this year and 2 per cent next year, with US investment declining 9 per cent this year and another 7 per cent in 2026.
Those projections suggest that the boom the Trump administration envisages in oil production – “drill, baby, drill” – isn’t going to eventuate. The increase in output this year may be the tail end of the boom that actually occurred under the Biden administration, when drilling and production in the US reached record levels.
Indeed, US shale producers are already cutting back their capital expenditures in response to lower oil prices.
Diamondback Energy, one of the largest producers in the largest US onshore oil field, the West Texas Permian basin, said last week that it was likely that US onshore oil production has peaked and will start to decline this quarter. It said the number of US fracking crews had fallen by about 15 per cent already this year and would continue to fall unless there was a quick rebound in oil prices.
Diamondback has cut its 2025 capital expenditure budget by $US400 million ($621 million) and reduced the number of drilling rigs it is operating. Other shale producers are also reducing their spending and, according to Baker Hughes, which monitors activity in the US shale basins, there are 25 fewer rigs operating today than there was a year ago – the lowest level in more than three years.
The US onshore oil sector is particularly sensitive to oil prices. While break-even prices vary significantly between the basis, the rule of thumb is that they generally need something above $US60 a barrel to break even on new wells and $US65 a barrel or more to generate profits attractive enough to provide an incentive to drill.
Oil prices have demonstrated acute sensitivity to Trump’s trade policies. After his “Liberation Day”, global oil prices plummeted, with Brent crude tumbling from about $US75 a barrel to less than $US60 a barrel. The US domestic price, the West Texas Intermediate (WTI), fell to as low as $US55 a barrel.
After Trump paused his “reciprocal” tariffs and agreed a 90-day truce with China, with big cuts to the tariff rates, oil prices have recovered, with Brent trading around $US66 a barrel and WTI around $US62 a barrel.
Not helping the position of the US producers is the impact of Trump’s tariffs on steel and steel products, cement and drilling fluids.
A leading energy consultancy, Wood Mackenzie, says costs will have risen 4.5 per cent by the fourth quarter of this year as a result of those tariffs, which remain in place. The firm expects the cost of the steel pipes used in drilling, production and completion of wells to rise by 40 per cent and be the major contributor to the overall cost increases.
So, the “prices down, costs up” outlook will lead to less investment and less future production.
That may be one of the objectives that the Saudi-led OPEC is pursuing.
OPEC+ has embarked on a U-turn in its strategy this year.
Oil prices have demonstrated acute sensitivity to Donald Trump’s trade policies.Credit: AP
For three years it restrained production. It took a total of about 6 million barrels a day of oil out of the market via production cutbacks over that period, with the Saudis bearing the brunt of those cutbacks – they contributed about 1 million of the 2.2 million barrels a day of “voluntary” cutbacks announced in late 2023 for last year’s production targets.
This year the cartel has started returning some of that curtailed production to the market. The original plan was to do it incrementally through to September next year.
Instead, after announcing an increase in output of 38,000 barrels a day in April, OPEC suddenly ramped that up to 411,000 barrels a day for May and then, earlier this month, announced a similar increase for June. In just over three months it will have added nearly half the volume that it had planned to add over 18 months.
The primary motivation for that increase, which has been led by the Saudis, is to respond to over-production from members of the cartel who haven’t honoured their commitments – Kazakhstan and Iraq in particular – and have produced at rates above their agreed caps.
The Saudis, having shouldered the bulk of the burden of reduced production, have had enough and are prepared to live with the lower prices – well below the estimated $US90 a barrel or so needed to balance their budget – in exchange for the bigger volumes and the opportunity to discipline the recalcitrant members of the cartel.
The ancillary benefit is the impact it has on the US, where shale has made it the world’s largest oil producer.
Driving the prices down will, as its own forecasts suggest, drive some shale producers out of the market and lower the US industry’s global market share, albeit that the shale sector is very flexible and innovative and has a greater ability to turn its production off and on than traditional producers.
The 2014 oil price collapse, triggered by a big surge in OPEC supply, saw oil trade below $US30 a barrel. It ignited a wave of bankruptcies in the US shale sector. As soon as the price stabilised, however, production sprang back, with significantly lower costs.
Trump’s trade war, even if its severity is scaled back after the 90-day pauses on the reciprocal tariffs on China end, is depressing both global economic activity and the growth rate of the US economy. The US economy grew 2.8 per cent last year. OPEC is forecasting growth of only 1.7 per cent this year.
Despite that lower growth in prospect, OPEC, pointing to last weekend’s temporary truce between the US and China, says there is potential for more lasting agreements and a normalisation of trade flows, albeit at potentially elevated tariff levels compared with the pre-Liberation Day escalation of trade hostilities.
Nevertheless, it has left its forecasts for the increase in global oil demand this year unchanged at 1.3 million barrels a day and downgraded them only slightly, to 1,281,000 barrels a day, for next year. By comparison, the International Energy Agency has forecast an increase of only 726,000 barrels a day.
If the US and the non-OPEC producers don’t reduce their output heavily this year, OPEC+ producers continue to unwind their production cuts at the current rate and the impact of the US trade policies continue to chill global economic activity, there is a very real prospect of as glut of oil developing and another big slump in prices.
Trump will get his lower prices in those circumstances, which would help modestly offset the impact of his tariffs on inflation. What he wouldn’t get is the boom in the shale oil sector that was supposed to be a key plank in his economic strategy.
