Trump 2.0 – Will the United States Boost Its Oil Production from Current Levels?
December 16, 2024
Article by Jeffrey Price
President-elect Trump is renowned for hyperbole (and worse), so it shouldn’t surprise anyone to have heard about his advocacy of Treasury Secretary nominee Scott Bessent’s plan to increase U.S. crude oil production by 3 million barrels per day. But, 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 is a pipe dream. But, in case folks insist on deluding themselves into thinking that this drilling binge might happen, a close reading of 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.
Reason: “free cash flow”. Up until five years ago, the industry followed a different mantra: drilling to generate new reserves to the Balance Sheet (aka “make money with the drill bit”). That’s how score was kept, but Wall Street developed an aversion to that principle. Consequently, oil & gas stocks tumbled badly. When the C-suite folks smelled the toast burning, they switched their companies’ emphasis over towards generating “free cash flow” which meant that more aggressive-debt-fueled drilling aimed at adding bookable reserves was obsolete as a business model. Given this new-found fiscal discipline, it is amazing that the U.S. producers have been able to boost its 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 every single year.
It is also a testimony to the efficiency of the service and supply industry. 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. It’s because the service & supply industry has also focused on efficient execution that U.S. production could ascend to today’s 13MM BOPD. Directly tied with this notion, we at First Keystone strive to provide highly efficient warehouses in Pecos, TX to support those companies and to achieve it inexpensively. Take our new Chaparral product as an example – unprecedented price points for new construction!
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 as it pertains to a responsive method for bringing the deficit under control. Indeed, the notion of ratcheting up efforts in the overall Permian region is reckless in our opinion. The industry today is in a halcyon era of stability and profitability across all major sectors ranging from landowner to the refiner and everything in between. Sure, there are plenty of areas for improvement – that’s why we at First Keystone envision building more Pecos industrial space for rent because there are inefficiencies that could be mitigated simply by establishing a point of presence (https://www.1keystone.com/site/) in the hub of the essential Delaware Basin – that’s why four more companies joined our Park community this year (https://www.1keystone.com/).
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 (https://www.barrons.com/articles/trump-tax-cuts-tariffs-wallet-ca405b63?reflink=desktopwebshare_permalink) looking at Trumponomics 2.0, a far more sobering assessment pointed out that the hodge-podge of Trump proposals were not at all positioned to address today’s yawning deficit of 6% of GDP.
As an aside, making the Pecos-based oil & gas support infrastructure more efficient would best be accomplished by including a very serious dollop of competitively-priced housing to support an expanded workforce domiciled in the region. The largest obstacle against a sea-change shift of laborers away from Odessa westward toward Pecos depends upon a stock of modern, affordable homes. In parallel, the First Keystone objective is to equalize – if not surpass – the quality of the Pecos light industrial space as contrasted to Odessa. We have done that – members of our Park community can get to their customers’ sites significantly faster at a lower cost. But, if and when the Pecos stock of housing could be significantly expanded, then the migration of companies making the switch would increase dramatically. So, getting back to the original subject, our commitment is to making Pecos a highly desirable locale to set up a service or supply facility.
In closing, the atmosphere in the Permian is ebullient, but all stakeholders are best served by acknowledging the big picture of the overall economy. Eye-on-the-ball is maintaining profitability – Pecos can benefit especially if the housing obstacle can be mitigated.
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.