By Kyle Isakower
President Trump evoked the “drill, baby, drill” mantra in his speech to the joint session of Congress last week. It comes as no surprise, the President promised to cut consumers energy costs in half when on the campaign trail last year. But can the U.S. “drill, baby, drill” our way to lower consumer prices in half?
Certainly, the President is a big supporter of the oil and gas industry, and with good reason. PriceWaterhouse Coopers estimates they support nearly 11 million U.S. jobs, over $900 billion in labor income and nearly $1.8 trillion in GDP. And because the cost of oil and gas impacts virtually everything consumers buy (oil and gas are used as feedstocks for thousands of products, and they power manufacturing and transportation of nearly everything we purchase as well) lowering energy costs can go a long way towards combatting inflation.
Many of President Trump’s policy proposals aim to boost domestic oil and gas production for both domestic and global markets. His proposals include expanding federal lease sales, providing more acreage for exploration and development. He also seeks to make permanent provisions of the 2017 Tax Cuts and Jobs Act, including lowering corporate tax rates and expensing of intangible drilling costs (IDCs) and other cost recovery provisions, thus ensuring long-term financial certainty for an industry with decades-long project lifecycles.
Additionally, the President supports permitting reform, streamlining government reviews and limiting legal challenges. This would accelerate approvals for exploration wells, utility projects, and critical infrastructure, including oil and gas pipelines, reducing delays and fostering energy investment.
Unfortunately for the President and the industry, there are other factors to consider. President Trump’s on again/off again tariff policies could increase the cost of crude oil, especially the import of Canadian crude oil. Because it is difficult to transport Canadian crude oil to ports where it can be shipped outside of North America, Canadian crude has for years sold at a discount relative to many other types of crude oil. This has been a boon to U.S. refiners, especially in the Midwest, who can receive these crudes via pipeline. Tariffs, however, will take away that economic advantage, because even if tariffs increase the price of Canadian crude, refiners must compete in a global market, limiting their ability to pass on this higher feedstock cost, and ultimately hurting Midwest refiners’ ability to be profitable and compete.
Another concern about tariffs for the oil and gas industry is their impact on steel. Steel cost can have a significant impact on the economics of a project. Not only does it impact the economics of pipeline projects, but well casings are also made of steel. A single horizontally drilled well in the Permian or Bakken basins can use 2 -3 miles of tubular steel, and often more! That higher cost of steel will be baked into the cost of oil, gas and petroleum products, reducing U.S. competitiveness.
While the President’s tariff policies may serve to increase domestic consumer energy costs, there are many positives for the energy industry, as noted above. So, let’s return to the original question: can consumer energy prices be cut in half?
Price at the pump is the metric most consumers look at, so let’s use that as our guide. The price of oil makes up a half or more of the price of gasoline at the pump. As the price of oil moves up or down, so does the price of gasoline (except in rare cases). So, can the President’s energy policies lead to a 50% drop in oil price?
Think about the economics of oil production. According to the Federal Reserve Bank of Dallas, break-even costs for the Permian Basin, the country’s most prolific oil shale play, is about $46 – $58 per barrel. If production increases significantly, putting downward pressure on oil prices and approaching the break-even costs, producers will likely slow investment, and therefore production, until prices rise again, ensuring that they can turn a profit.
As of this writing (March 3rd) crude oil price is about $66/barrel, and the average gasoline price in the U.S. is $3.11/gallon. With prices already approaching the break-even costs, it is unlikely that we will see a major increase in investment to increase production further.
Bottom line, the President’s policies are certainly beneficial to the oil and gas industry, and may well help reduce consumer energy prices, but it remains to be seen whether we will experience $1.56 gasoline in 2025.
Kyle Isakower is Senior Vice President of Energy and Regulatory Policy at the American Council for Capital Formation
