Drill, baby, drill: From pledge to pipedream

United States energy dominance was a centrepiece of President Donald Trump’s election campaign. Aside from being a pithy slogan that clearly captured his stance on various issues, “drill, baby, drill” became his pledge to unburden America’s oil and gas industry from inefficient regulation.

The increase in U.S. energy supplies, it was argued, would have the added benefit of lowering prices at the pump, helping to tame the inflationary pressures that became a key campaign issue for voters. U.S. Treasury Secretary Scott Bessent laid out a more measurable aspiration, as part of his 3-3-3 plan—a 3% GDP growth rate, a 3% budget deficit ratio and three million extra barrels of oil output a day to boost U.S. energy production.

“Drill, baby, drill” was enthusiastically cheered by U.S. energy producers, and President Trump did deliver on his promise by signing executive orders aimed at rolling back regulations on the industry, opening more federal land for drilling, and easing back on support for alternative energy sources. However, U.S. producers haven’t followed through. In fact, in the first quarter of the year, rig counts in the U.S. were down 4% compared to a year earlier, marking a 7% decline compared to the five-year average.

Challenges facing U.S. oil producers

So, why aren’t U.S. oil and gas companies drilling more? For starters, U.S. shale producers face higher breakeven prices compared to other swing producers. According to the March Dallas Fed Energy Survey, shale producers, on average, need a price of at least US$65 a barrel to drill profitably. For context, that’s double the breakeven price of onshore Middle East oil producers.

Amid fears that the trade war set off by U.S. tariffs will slow global economic growth and demand for oil, global benchmark crude prices have fallen around 15% this year. In April, West Texas Intermediate, the North American benchmark oil price, averaged US$63 per barrel.

Additionally, tariffs on U.S. steel imports have increased the price of fracking equipment, pushing up production costs and potentially producer breakeven prices as well. Given higher production costs and lower prices, the economics don’t currently support an increase in drilling activity in the United States, especially considering shareholder focus on capital discipline, with the memory of the 2014-2020 period still fresh in the minds of many.

Short-term market fundamentals are also not expected to convince U.S. oil producers to increase investments in new production. Even before tariff-related economic uncertainties, the global oil market was expected to be in surplus both this year and next, putting downward pressure on oil prices.

OPEC+ and global economic growth

Now, as the world’s largest oil cartel, OPEC+, begins to reverse oil production cuts and add more oil to the market (partly due to U.S. pressure), and global economic growth weakens, market fundamentals will make it even more difficult for U.S. oil producers to increase capex. Over the medium- and long-term, technological advancements and the increased electrification of our economies are expected to further improve energy efficiency and dramatically reduce the energy needed to produce the same amount of output.

Geological constraints also pose a significant challenge, amid the continued depletion of the world’s oil reserves. Following the shale revolution, which began around 2008, U.S. oil production has been on a solid upward trend. In 2024, total U.S. production reached a record 13.2 million barrels per day, making the U.S. the world’s top oil producer, with more than 65% of the production coming from tight oil basins. However, as any hydrocarbon basin is a finite resource, the nearly two-decades-old U.S. shale boom is drawing closer to its end.

While some industry experts contend that U.S. shale production may have plateaued last year, the U.S. government’s Energy Information Administration (EIA) expects U.S. crude oil production to peak at around 14 million barrels per day in 2027, falling short of Secretary Bessent’s 16 million barrels per day target. After that, production is expected to gradually decline to about 12 million barrels per day by 2040. As the most accessible oil reserves are depleted, extracting the remaining resources will become increasingly difficult and expensive, further challenging President Trump’s vision and Bessent’s target.

The bottom line: Market fundamentals dictate drilling decisions

Since U.S. oil producers make drilling decisions based on market fundamentals, drill, baby, drill may have gone from a pledge to a pipedream. Unlike in Saudi Arabia or in Russia, swing producers with state-owned oil industries, U.S. production decisions will be dictated by shareholder interests.

Unless nationalizing U.S. oil companies is an option, it’ll be very difficult to pressure the shale industry to ramp up production. If tariff-induced pricing pressures start pushing up other costs for U.S. consumers, the basic laws of market economics may be inconvenient rules that the Trump administration won’t be able to ignore.

This week, a very special thanks to Zhenzhen Ye, Economist in our Economic and Political Intelligence Centre.

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