Republican presidential candidate Donald Trump has said that if re-elected, “dig, dig, dig” to lower energy costs will be his top priority.
“Republicans have a plan to lower prices, and lower them very quickly. By lowering the cost of energy, we’re also lowering the cost of transportation, manufacturing and all of our household goods,” Trump said at the Republican National Convention last Thursday.
The problem, industry watchers say, is that when oil prices get too low, energy companies don’t want to produce any more.
“There’s so much production that the prices of the products aren’t going to come down that much,” said Samantha Gross, director of the Energy Security and Climate Initiative at the Brookings Institution, a nonpartisan think tank.
The Dallas Fed’s National Energy Survey found that oil prices would need to average $64 a barrel for drilling to be economically viable. West Texas Intermediate (CL=F) was above $77 a barrel on Wednesday. International benchmark Brent crude (BZ=F) was trading just above $81 a barrel.
“The lower the price, the less U.S. producers will drill. [or] “There are fewer profitable wells, so there are fewer pumps,” Rebecca Babin, senior U.S. energy trader at CIBC Private Wealth, told Yahoo Finance this week.
Oil companies are fresh off a wave of consolidation and are focused on returning cash to shareholders and capital discipline, both of which will “tame the ‘drill, drill, drill’ mentality,” Babin said.
“Consolidation gives the acquiring company more influence over U.S. production. Larger companies are more focused on returns on capital and are likely to be less influenced by the political backdrop,” she added.
Philip Rossetti, a resident senior fellow in the energy policy program at the R Street Institute, a center-right think tank, said Trump’s biggest lever to influence producers would be to ease restrictions on permits for drilling on public lands.
A Government Accountability Office study of the drilling permitting process over the past few years found that it took an average of 196 days to review a permit application in 2016, when Democratic President Barack Obama was in office. That process had been cut by more than half by 2019, when President Trump took office.
“That’s a big difference,” Rossetti said, “and it makes a qualitatively big difference in how easily we can facilitate the process and increase production on federal lands, which represent a huge portion of our oil and gas production.”
Oil rigs and pumps on H&P Rig 488 in Stanton, Texas, June 8, 2023. (SUZANNE CORDEIRO/AFP via Getty Images) (SUZANNE CORDEIRO via Getty Images)
The Biden administration raised royalty rates for drilling on federal lands by more than a third to 16.67% earlier this year. Wall Street is betting that a Trump victory could see cuts to everything from royalties to pipeline regulations.
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“I think we’ll see a significant easing of energy restrictions very soon,” Neil Dingman, managing director of energy research at Truist Securities, told Yahoo Finance on Wednesday.
Analysts said the prospect of a big increase in production alone could send oil prices “down by at least 10 percent, and possibly closer to 20 percent,” from $70 a barrel to the high $60s.
On the other hand, if the Democratic Party were to remain in power while maintaining the current regulations, [could] It could go up to more than $90 a barrel,” he added.
While Democrats are trying to move the U.S. away from fossil fuels, it’s worth noting that the oil industry has achieved record profits and production under the Biden administration.
Jared Brickle, a statistician at Yahoo Finance, points out that the S&P 500 Energy Select ETF (XLE) has risen 218% since President Biden took office, as Russia’s invasion of Ukraine caused crude oil futures prices to soar and major oil companies posted record profits.
Under Trump, the XLE fell 56% as demand plummeted during the pandemic.
“Certainly, President Trump has some levers to lower costs by increasing production, but these are just one component of energy prices that are primarily determined by global markets,” Rossetti said.
JPMorgan strategists expect the average price of Brent crude to fall to $75 next year from $83 in 2024 due to slowing demand growth and increased use of electric vehicles.
Oil bloc OPEC+ said in June it would keep most production cuts in place through 2025 but phase out voluntary cuts from October. The Saudi Arabia-led oil alliance will begin cutting production from the second half of 2022 to maintain a floor on prices.
“My guess is that President Trump will negotiate with OPEC countries to increase production,” Ed Hirsch, a senior fellow at the University of Houston, told Yahoo Finance.
Unlike other oil-producing countries, the U.S. oil industry is privatized, making it more difficult to influence producers’ output.
“[Trump’s] “We have no intention of lowering oil prices in the interest of our people, but this will come at the expense of our domestic oil industry,” Hils said.
This is one of those “be careful what you wish for” scenarios, he added.
Inés Ferré is a senior business reporter at Yahoo Finance. Follow her on X. Follow.
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