Donald Trump’s administration has indicated a desire to see crude prices fall to $50 a barrel or lower but the benefit for US consumers risks throttling the same oil industry the president wants to expand.
On the campaign trail Trump repeatedly talked about very low gasoline prices of $1.87 a gallon — equivalent to about $20 a barrel for crude — as “a perfect place, an absolutely beautiful number”.
The debate over what oil price the US president is seeking has hardened in the past week after Peter Navarro, one of his trade advisers, suggested that if oil fell to $50 a barrel it would help tame inflation.
Brent crude, the global benchmark, dropped to $68 a barrel last week, the lowest in three years, as the Opec+ producer group confirmed plans to gradually increase output.
Analysts warn that a much bigger decline could make it nearly impossible for the administration to meet another of its targets — expanding US energy production by 3mn barrels of oil or equivalent a day by 2028.
“Fifty dollars a barrel is going to hurt the United States more than benefit it, and it’s definitely not going to allow the US to produce more oil, which is something that Trump also wants to see,” said Claudio Galimberti, chief economist at Rystad Energy. “The two objectives are incompatible.”
The last time Brent was less than $50 a barrel was November 2020 during the coronavirus pandemic. US gasoline prices have not been as low as $1.87 a gallon since May 2020.
US energy secretary Chris Wright told reporters this week that the administration did not have a target price for crude oil. However, he reiterated earlier claims to the Financial Times that by loosening regulation and other barriers to production, US oil companies would be able to boost output, even at prices as low as $50.
The goal is “to encourage capital investment, make it easier to build infrastructure, and therefore lower the costs of people making decisions to drill oil and gas wells and grow supply”, he said. “More supply will lead to lower prices and more opportunities.”
The implications of low oil prices for the US economy have changed over the past decade due to the dramatic expansion of shale production. The US pumped more than 13mn barrels a day last year compared with 6mn in 2012, turning it into the world’s biggest oil producer and a net exporter.
Whereas lower oil prices were historically a boon for the US economy, today it would crimp revenues in the oil sector even as it reduced costs for consumers.
S&P Global Commodity Insights estimates that the average break-even price for US shale producers this year is $45 per barrel and many analysts and oil executives said too many US shale producers would be unprofitable at $50/b to grow US output.
Paul Horsnell, head of commodities research at Standard Chartered, said that $50 a barrel crude “would seem a bit of a pyrrhic victory”.
“Shale economics might still work in some small parts of the Delaware and Midland basins, but the rest, including Oklahoma, Rockies, Bakken, south Texas, would struggle to keep going,” he said.
In Dunn County in North Dakota’s Bakken basin, which receives much of its budget from a production tax on oil producers, 84 per cent of the population voted for Trump. “It’s counterintuitive,” said Tracy Dolezal, Dunn’s county commissioner. “We will see a slowdown in activity . . . that is going to have an impact on revenue.”
Trump’s announced tariffs on imports of crucial materials, including aluminium and steel, were also driving up costs for oil producers at the exact same time his administration was asking them to “drill baby drill”, noted Martijn Rats, global oil strategist at Morgan Stanley. “Those things drive break-even higher not lower,” he said.
Scott Sheffield, one of the pioneers of the US shale revolution, said $50 oil forced US shale producers to cut output, allowing other countries, particularly Opec members, to increase market share and raise prices at a later date.
“It’ll put Opec and Saudi Arabia into greater control by 2030, so they are able to increase market share significantly,” he said. “I really don’t think they have thought through the ramifications. It is good for the consumer but it’s going to be very bad for [US] energy.”
Trump is expected to continue his calls on Opec+ to increase production faster but the cartel would be unlikely to allow prices to fall as low as $50 a barrel without intervening.
“Fifty dollars per barrel would be a big problem for them,” Galimberti said, adding that Opec+, led by Saudi Arabia and Russia, had said it could pause and reverse the production increases at any time.
Saudi Arabia needs an oil price close to $100 a barrel to balance its budget, according to the IMF, while Russia is dependent on revenue from oil exports to fund its war in Ukraine.
Wright offered the industry his full support at the largest annual gathering of US oil executives in Houston this week. “We need more energy. Lots more energy,” he said.
The address received a rapturous reception, but in private, executives are far less convinced, concerned about unpredictable policymaking and the Trump administration’s apparent desire to crash the price of their product.
At a dinner the night before attended by Wright and chief executives, one half of the room was cheering and the other half was silent, said one person who attended. “The people who don’t like it are just too frightened to speak out at the moment.”
