Community Divided: Will Trump's Presidency Hold Back American Oil Production?

In a turbulent trading session on Wednesday, oil markets fluctuated wildly as Brent crude for January delivery took a nosedive before bouncing back, following Donald Trump's decisive victory over Kamala Harris in the race for the White House. Concerns have arisen on Wall Street that a second Trump administration could pose risks to oil prices, with an expectation that producers may unleash their drilling ambitions without the constraints perceived from the Biden administration's policies.

However, a new analysis from commodity experts at Standard Chartered paints a different picture. They argue that U.S. oil production dynamics, especially in the shale sector, have evolved dramatically since Trump’s first term began in 2017. In August 2024, U.S. crude output reached an astonishing 13.40 million barrels per day (mb/d), smashing the previous record of 3.31 mb/d marked in December 2023. This surge represents a remarkable recovery, with production climbing by 4.7 mb/d since the drastic lows of the pandemic in May 2020. Yet, it’s only marginally higher—by 0.4 mb/d—than pre-pandemic levels recorded in November 2019, translating into a modest average annual growth of just 80,000 barrels per day during this period.

Looking ahead, Standard Chartered projects that this growth trajectory is expected to decelerate further, with 2024 seeing a mere 630 kb/d increase, and an anticipated slowdown to just 300 kb/d in 2025. This trend suggests that the post-pandemic recovery in U.S. oil output may be reaching its limits.

The current structure of the oil industry offers insight into these forecasts. Unlike many OPEC nations which often function under a national oil company, U.S. oil production is heavily influenced by a mix of majors, independent producers, and private firms. In recent years, these companies have shifted away from aggressive drilling practices. Instead, they’re focusing on capital discipline—prioritizing shareholder returns through dividends and stock buybacks over rapid production increases.

Recent mergers and acquisitions have consolidated the industry, transitioning from a fragmented field of small producers to larger, more integrated operations. This consolidation has advanced technological capabilities, enabling companies to employ complex drilling methods that optimize oil extraction while reducing dependency on a high rig count. Interestingly, production has been on the rise despite a notable drop in the number of active drilling rigs, a trend supported by improved operational efficiencies.

Goldman Sachs echoes Standard Chartered’s cautious outlook. In July, they projected that U.S. crude output would rise by half a million barrels per day this year, a significant slowdown compared to last year’s gains of over 1 million barrels. It’s anticipated that the Permian Basin, a crucial area for oil production, will contribute an annual growth of 340,000 bpd—down from earlier predictions of 520,000 bpd. The bank warns that the Permian is entering a phase of maturation, which could weigh heavily on future production levels.

Adding to the complexities, oil output profiles differ between shale and conventional oil production. Shale production can ramp up quickly but often sees peak production levels maintained for only a short duration—typically just months—before experiencing a steep decline. Factors such as reservoir characteristics and drilling techniques cause declines ranging between 40% to 80%. This necessitates continual new production to maintain supply levels, leading to what is termed the 'Red Queen effect.'

The looming threat of tariffs may further inhibit production growth. Back in 2018, Trump enacted substantial tariffs on steel and aluminum imports, a strategy he has signaled could expand to 60% on various foreign goods. Since steel is vital for drilling and production infrastructure, these tariffs present significant cost challenges for U.S. oil producers, especially given the heavy reliance on imported steel piping necessary for operations.

While Trump’s administration may facilitate opening federal lands for exploration, Standard Chartered cautions that the lengthy licensing, exploration, and production timelines indicate that any production gains from these endeavors will likely come long after any new policies take effect.

In conclusion, while the atmosphere of expectation following Trump's win raises hopes for increased oil output, experts foresee a more complicated landscape shaped by market realities and cost constraints. Will the combination of cautious corporate strategies, evolving dynamics, and external economic pressures hold back American oil production under Trump’s leadership? Only time will tell.