On the campaign trail, President-elect Donald Trump vowed to lower consumer prices, which have soared since the pandemic, and explained how he would do it by repeating a simple mantra: “Drill, baby, drill.”
“At the heart of our efforts to rein in the cost of living is a full-throttle push to end the Biden-Harris war on American energy,” President Trump said at a campaign rally in Asheville, North Carolina, on August 14. said. “We train, baby, we train.”
Reuters reported last month that President Trump is expected to shorten drilling permits, which took an average of 258 days to complete under the Biden administration, increase the frequency of permit sales and increase drilling off U.S. coasts. There is.
These measures could theoretically help lower the prices of oil and gasoline by increasing oil supplies, and lowering the prices of food and other goods by reducing transportation costs.
Will the strategy work?
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Experts interviewed by USA TODAY say that’s unlikely.
“The global oil market determines the balance between supply and demand,” said Robert Kaufman, a professor at Boston University who studies global oil markets, climate change and land use change. He said a significant increase in U.S. production would trigger a reaction from other producing countries and keep oil and gas prices roughly unchanged.
Let’s take a closer look at this issue.
What is the actual inflation rate today?
Annual inflation has slowed to less than 3% from a 40-year high of 9.1% in mid-2022, but consumer prices remain depressed as the coronavirus pandemic continues to slow consumer demand and supply chain surges. About 20% higher than before. bottleneck.
Americans’ outrage over rising prices under President Joe Biden was a big reason Vice President Kamala Harris lost the presidential election to Trump, according to a study by the Brookings Institution.
“I won on groceries,” Trump told host Kristen Welker in an interview on “Meet the Press” this month. “I won the election on that basis. … We’re going to bring those prices down significantly.”
The president-elect appears to backtrack on his pledge in an interview Time magazine published Thursday as part of its announcement naming Trump its “Person of the Year.”
“It’s difficult to bring down a situation once it’s gone up,” he says. “You know, that’s very difficult.”
And most economists say President Trump’s threat to impose additional tariffs on imports from Mexico, Canada and China as early as next month, and other taxes that follow, will exacerbate rather than ease price increases. .
Still, President Trump’s pledge to lower gas prices is the most concrete blueprint for combating inflation. At a rally in Asheville in August, the former president said his administration would “cut (energy) prices in half within 12 months.”
For example, Trump signaled he would resume drilling in Alaska’s Arctic National Wildlife Refuge after Biden canceled Trump’s lease in the sensitive area last year.
Why are U.S. gas prices falling?
But pump prices have already plummeted. The price of a U.S. benchmark crude oil called West Texas Intermediate has fallen to about $70 a barrel from $120 a barrel in June 2022, immediately after Russia’s invasion of Ukraine. Meanwhile, the average price of unleaded gasoline in the U.S. has fallen from nearly $5 a gallon to about $3 a gallon, according to AAA.
Kaufman attributes the decline to a record decline in global oil production, particularly in the United States, softening energy demand in China and around the world amid slowing growth, and European countries’ increasing demand for Russian oil. One example is the ability to find alternative resources.
Does America produce the most oil in the world?
In fact, the United States is already the world’s largest producer of crude oil, recently pumping out a record average of 13.6 million barrels per day, according to the U.S. Energy Information Administration and the privately owned Oil Price Information Service. According to the EIA, the country will produce an average of 12.9 million barrels of crude oil per day in 2023, making it the world’s largest producer over the past six years, surpassing Saudi Arabia and Russia.
“U.S. oil production is at an all-time high and is increasing under the Biden administration without drilling new land or oceans,” Kaufman said.
What is fracking in simple terms?
EIA allows producers to extract more oil from larger areas using fewer wells through horizontal drilling and hydraulic fracturing, which uses water, sand and chemicals to pump oil from deep underground. It is evaluated that it has become.
Much of the activity occurred in the Bakken Rock Formation of North Dakota and Montana and the Permian Basin of West Texas and New Mexico.
What will happen to the price of crude oil as production increases?
Crude oil prices are hovering around three-year lows. If the Trump administration makes new federal lands and waters available for drilling, which causes producers to pump out enough additional oil to drive down global and U.S. prices, “companies will The rate of drilling will be slower,” Kaufman said, adjusting prices. I’ll wake up again.
Adam Ferrari, CEO of North Dakota and Montana oil producer Phoenix Capital Group, called current U.S. oil prices a “floor.” He said the company can make a profit as long as oil prices remain above about $25 a barrel. But drilling a new well costs about $45 to $65 per barrel, he said.
“If prices fall any further, we will stop producing oil from new wells,” Ferrari said, as the company wants to cover its costs and earn a profit of about 15%.
Is it a good idea to invest in oil exploration?
Another factor is that oil companies have become very conservative in their capital spending.
Analysts say oil producers have been spending billions to drill new wells since the beginning of the pandemic, when weak demand caused oil prices to plummet, so they can operate existing wells cost-effectively and provide a healthy return to shareholders. He says that he has changed his approach to providing more benefits.
“This has dramatically changed their priorities,” said Rob Summell, senior portfolio manager and oil industry expert at investment firm Tortoise Capital. “They became more disciplined with their capital spending” and focused on increasing cash flow.
Of course, companies will still need to drill new wells as existing wells dry up and meet slowly increasing global demand. World oil production, currently at about 102 million barrels per day, is expected to increase by about 1 million barrels per day every year, Tumel said.
Ferrari said opening up new federal territory to drilling would be beneficial in the long run and increase efficiency, given the oil content per square foot is higher than current fields.
But existing fields, particularly the 9,000-square-mile Bakken, have enough exploration capacity to meet expected demand, even the surge in demand that has sent prices soaring, without making new federal land available. , Tummel said. Most oil production occurs on private land, with about a quarter on federal lands and waters, Tumel and the American Petroleum Institute said.
Moreover, a sudden rise in prices that throws the market out of balance would likely prompt an immediate increase in production by the Organization of the Petroleum Exporting Countries (OPEC), he said.
Does the US have enough refining capacity?
If US oil production increases rapidly under President Trump’s guidance, other problems will likely arise. Most U.S. refineries that turn oil into gasoline are equipped to process heavy, cheap crude oil imported from countries such as Canada and Mexico.
As a result, the country doesn’t have enough refining capacity to absorb the new flood of light, sweet crude produced domestically, Ferrari and Tummel said. They said new refineries would need to be built or existing facilities renovated, which would be costly.
Heavy crude oil has a higher density and is cheaper to buy than light crude oil, but it is more difficult and expensive to process in refineries.
That’s the main reason the U.S. imports 6.5 million barrels a day, mostly heavy crude oil, even though the U.S. appears to be producing enough oil to meet demand, Tummel said. said. And the country exports 4 million barrels of light sweet crude to countries with refineries built to process that variety.
