Trump 2.1 – Revisiting Whether the Oil Production Will Grow by 3MM BOPD
December 16, 2024 Article by Jeffrey Price(Updated February 13, 2025)
President Trump, after three weeks in office, has been too busy to ballyhoo Treasury Secretary Bessent’s plan to increase U.S. crude oil production by 3 million barrels per day. (After all, is the roll-out of the “Mediterranean Riviera” plan more eye-catching!?). Today, it still seems to hold water that (according to a recent article in the Financial Analysis and Commentary section of the Wall Street Journal (November 27)), “not only does that energy plan seem impossible to implement, it makes little sense” [emphasis added]. This thoughtful analysis covers almost all of the bases as to why this idea continues to be a pipe dream. Take, for example, the story in the Midland Reporter Telegram (December 7) which headlined that Chevron is substantially reducing its CapEx slated for the Permian in 2025. The article, authored by the ubiquitous Mella McEwen, pointed out that Chevron prioritizes free cash flow. In short, the oil industry is rightly ignoring the Trump/Bessent call. Take a look at this recent Economist article, as well.
Reason: “free cash flow”. Up until five years ago, the industry marched to a different drummer: drilling to “make money through the drill bit”. Wall Street eventually developed an aversion to that principle as those “values” were wiped out with each cyclical downturn. Consequently, oil & gas stocks tumbled badly. Later, the C-suite folks switched their companies’ emphasis to generating “free cash flow”. Adding bookable reserves became obsolete as a business model.
Given this new-found fiscal discipline, it has been a miracle that the U.S. producers have nevertheless been able to boost vs annual production YoY by a million daily barrels over each of the last few years while adhering to the free cash flow mantra! This achievement is a testimony to the impressive rate of productivity improvements realized every single year. The industry is clearly doing more with less. This leap forward in productivity was also made possible by the growing efficiency of the service and supply industries. The service & supply industries have also focused on efficient execution. The industry is fixated on it! Directly tied with this notion, we at First Keystone rent warehouses in Pecos, TX to support those companies to achieve it inexpensively. Take our new Chaparral product as an example – unprecedented price points for new construction! These kinds of gains in oil production while maintaining financial discipline simply could not have occurred with the service industry’s cost structure that existed 10 years ago.
But, let’s get back to that Wall Street Journal analysis. We hope you’ll read it because its main focus was not on the 3 millions barrels a day, but on Scott Bessent’s catchy “3-3-3” plan for managing the economy including bringing the runaway federal deficit back under control. Thirty years ago, a former Midlander, Geoge H.W. Bush, criticized another fellow Republican for using “voodoo economics”. Today, that term might very well be leveled at Bessent – especially regarding oil production! Indeed, it’s fair to say that ratcheting up daily supply from the overall Permian region is widely viewed as reckless. The industry today is in a halcyon era of stability and profitability. Why rock the boat?
There are areas for improvement – we at First Keystone rent warehouses in Pecos, TX because service companies now acknowledge that establishing point of presence in the Delaware Basin increases efficiency – that’s why four more companies joined our Park community in 2024.
The other two “3s” in the Bessent plan are quite interesting, as well. One of them is the laudable goal of reducing the federal budget down to a manageable 3% of GDP (half of the current run rate). That’s straightforward and understandable – but it’s a goal, not a Plan of Actions. The other “3” stands for how fast the economy should be growing and a 3% real rate is a challenging, but achievable, figure for this mature U.S. economy. It would certainly be a healthy component of the overall economic scenery, but it isn’t really a tool either. Interestingly, Bessent, who is well respected, has totally avoided the elephant in the room – that would be called higher taxes.
In fact, the Wall Street Journal had more to say about Bessent and Trump’s fiscal thinking a few days later in its December 10th edition. In an article zeroing in on the softening of interest rates for the key 10-year Treasury bond, the favorable turnaround in interest rates were attributable to the nomination of Bessent to be the Treasury Secretary. It was noted that he is “viewed by Wall Street” as a responsible steward of the economy. However, in the very same issue, another article looking at “Trumponomics 2.0”, gave a far more sobering assessment and pointed out that the hodge-podge of Trump proposals were not at all positioned to address today’s yawning deficit of 6% of GDP. It’s no surprise to anyone paying attention to this frightening statistic that the Fed did not cut its benchmark last week. Indeed, the zig-zag pattern of 10-year Treasuries (4.50% – 4.80% range) appears to be an anomaly as it implies the runaway budget is being brought under control. Maybe all those “fired” federal employees are solving all our fiscal problems?
In all seriousness, out in our microcosm of Far West Texas, the First Keystone objective remains to provide top-quality industrial buildings for lease in Pecos, TX. Members of our Park community can reach their customers’ sites significantly faster at a lower cost. We aim to help our Park community be efficient and profitable. The entire Pecos community benefits if it has modern warehouses and industrial buildings available for rent.
The opinions expressed above reflect only those of the author and do not represent those of the First Keystone Pecos Industrial Park organization. First Keystone welcomes responsible fact-based discourses on these topics.