Trump’s “Drill Baby Drill” is not what it seems by Stephen V. Arbogast

It was no surprise in the wake of President Trump’s reelection that his energy policy was quickly outlined as ‘Drill Baby Drill.’  Trump has long used that slogan to signal his intention to unlock America’s oil & gas production from the regulatory chains imposed by his Democrat opponents.  The slogan conjurers up images of new gushers of production and boom times in Red producing states.  A second, deeper look reveals a more complex game plan and set of likely outcomes.

Start with the fact that what Trump’s administration can readily alter is more likely to boost natural gas production, not oil.  One step the President can take on Day 1 is to remove the ban President Biden placed on new LNG export facilities.  Eliminating the ban will only enable new plants to come online in 2028 or beyond.  However, planning and construction can begin now.  Moreover, the mere prospect of increased LNG exports will boost natural gas prices from their currently depressed state.  Trump’s desires to stimulate the domestic economy while improving the trade balance with Europe and Asia are both served.  Further unlocking production in Pennsylvania’s massive Marcellus formation will also not hurt his party’s electoral prospects in that vital swing site.

A tougher, but also doable lift will be unlocking the path to new pipeline construction.  A rough consensus is already forming in Congress around permitting reform.  That portion of the Democrat coalition which has effectively stalled new pipelines will certainly oppose a reform which promotes them.  However, there are many pieces that can be traded here.  Pipelines don’t only move oil and gas.  They are also needed to move CO2 and hydrogen.  Moreover, long distance power transmission is required to promote decarbonization via renewables electrification.  Permitting/licensing reforms are needed for those long-distance lines, for offshore wind, and for new nuclear in the form of Small Modular reactors.  A political bargain is there to be made. This could take the form of an ‘omnibus’ permitting bill, something as ‘all of the above’ as was Biden’s ‘Inflation Reduction Act’.  As part of the ‘deal performance art,’ Trump may promote and then sacrifice the Keystone XL pipeline to better secure new gas lines out of the Marcellus and other fracking basins.

Oil production is a different story.  A Trump administration can make more production possible.  It can reopen Federal lands to drilling and run more auctions of offshore exploration blocs.  However, the decisions needed to deliver the 3+ million barrels/day of increased production now being touted – those decisions reside with America’s private companies.  It was no coincidence that ExxonMobil CEO Darren Woods made openly skeptical comments about the likelihood of companies stepping up to deliver that volume growth.  Today West Texas Intermediate, the U.S. benchmark crude, is below $70/b.  Prices have been declining since it became clear China was caught in economic malaise and the Middle East conflicts were not going to disrupt oil supplies.  Woods’ skepticism has its roots in the fact that oil prices are not signaling ‘Drill Baby Drill’ to the industry.

That said, Trump’s invitation directly engages a classic industry dilemma – do we keep increasing production ‘if we can physically and if the marginal economics remain profitable?’  That invitation is there today.  Breakeven prices/costs in America’s Permian basin are down to $40/b or less.  Other basins are almost as attractive.  So, $70/b looks pretty good to producers ‘at the margin.’  In similar past situations, producers went for volume and hoped the price would hold.  In 2015 it did not.  Prices dropped to $50/b or lower, and Wall Street investors in independent firms and drilling funds rebelled.  Since then, the industry has touted its ‘discipline.’  Historically, such promised discipline has held for only a time.  Today, as in the past, there is the tempting assumption that the U.S. can grow while OPEC, meaning the Saudis, will cut production to support prices.  Historically, that also has held, until it didn’t.

Which brings us to the last piece of this complex puzzle – what if Trump’s other objectives aren’t fat profits for oil producers?  What if he’d be happy with two other results: 1) boom employment in Red states from lots of drilling activity and 2) lower inflation due to low and lower oil prices?  Some of Trump’s other economic moves, e.g., tariff boosts, may prove inflationary.  Countering that with low oil prices can only help his overall economic policy, even as Drill Baby Drill supports the Red state working class voters that are core to his political coalition.  These goals, and the leverage increased oil & gas exports will provide for Trump’s foreign policy negotiations, may be the real ultimate targets.

As we embark on this ‘second date’ with a President Trump, it is worth remembering an insight which surfaced during the campaign: ‘take Trump seriously but not literally.’  This comment is a warning not to overreact to his exaggerated statements.  Many are offered as part of Trump’s negotiating style.  Extrapolating these statements directly into consequences is to miss their tactical nature; many later disappear, forgotten in the wake of whatever deal gets struck.  Trump threatened Mexico with disruptive tariffs in his first administration.  What he got was Mexican cooperation on the border, including the signature ‘Remain in Mexico’ policy and use of Mexican security forces to stop northern migration at Mexico’s southern border.  That case is illustrative.  Often Trump’s objective is not in plain sight.  We should consider that the same may hold true in the case of ‘Drill Baby Drill.’