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On the shifting energy mix, tariff impacts, and carbon capture
Mining companies have asked for federal support — but this isn’t what most of them had in mind.
On financial shocks, severe flooding in the South, and data centers
Some producers were already renegotiating contracts due to rising costs. Then came “Liberation Day.”
There were a lot of tariff losers, but only one tariff winner.
Companies have been trying for years to domesticate their supply chains. They didn’t move fast enough.
A double whammy of presidential policies — more OPEC output and historic trade levies — are sending fossil stocks tumbling.
President Donald Trump campaigned on a promise to “drill, baby, drill” and help the American oil and natural gas industry. Executives loved it — the industry gave more than $75 million to Trump’s campaign and its affiliated groups.
Now the trade is blowing up in their faces. This week, the president accomplished two of his biggest goals — and the result has slammed the oil industry and imperiled its near-term future. The U.S. oil and gas industry has now stopped growing — and may even lurch into a recession — and there’s no sign yet that Trump or any of the oilmen surrounding the president have noticed.
The double whammy began on Wednesday, when Trump announced eye-watering tariffs on dozens of countries and trading blocs around the world. The tariffs amount to the largest tax hike on Americans since 1968, according to J.P. Morgan, and they have triggered a meltdown in global markets.
Those tariffs would have been bad enough. But early Thursday morning, the oil cartel OPEC+ announced that it would boost oil production by 411,000 barrels a day next month — far more than expected — which will essentially compress three months of supply increases into one.
This is bad news for U.S. producers, who compete with OPEC’s oil on global markets. But what’s astonishing is that Trump had been the leading voice calling for OPEC+ to boost its supply. Since January, Trump has hectored the cartel to “bring down the price of oil” in order to ease inflation and end the Ukraine war. Now they’re doing so, and it could not come at a worse possible time for the American oil and gas industry.
Since Wednesday, the West Texas crude oil benchmark has fallen by roughly 14%. A barrel of oil now trades at about $62. That is well below the $65 level that oil producers need in order to turn a profit drilling new wells nationwide, according to the most recent Dallas Fed survey of energy companies. It’s so low that it could essentially prohibit any new drilling activity in the United States for the time being.
These two policies have essentially frozen the U.S. oil industry for now, according to Rory Johnston, a longtime oil analyst and the author of the Commodity Context newsletter.
“You’re probably seeing more pauses of initial investment intention than the initial Covid shock. It’s really bamboozling,” Johnston told me. “Everything else is really, really starting to grind to a halt, and you’re not seeing anyone jumping over themselves to ‘drill, baby, drill,’ despite the White House’s claims.”
The week has seen brutal sell-offs for major oil companies and the smaller independents. As of Friday afternoon, shares of Diamondback Energy, a Texas-based oil exploration firm, had lost 20% of their value since Monday. The Dallas-based Matador Resources lost 22% in the same time. The oilfield services giant Halliburton is down 20% on the week and 50% in the past 12 months. Nabors, another oilfield service provider, is down 30% in just the past five days.
The traditional major oil companies have held up only somewhat better. Exxon’s shares are down more than 10%, bleeding at least $55 billion in market value, since the president’s tariff announcement. Occidental Petroleum is down 15% on the week while Chevron is down 13%.
At current prices, new oil drilling could even shut down in the Permian Basin near Midland, Texas — the cheapest part of the country to extract. Oil companies need crude to trade above $61 in order to turn a profit drilling there, according to the Fed survey.
Natural gas prices have also fallen. The benchmark for U.S. gas prices, called Henry Hub, has lost 6% so far in trading on Friday.
Why? There are a few big drivers. Although oil and natural gas imports are technically exempt from President Trump’s most recent tariffs, they haven’t been spared from the macroeconomic fallout. If the tariffs lead to a global downturn, which J.P. Morgan analysts now believe is more likely than not, then oil demand will fall.
Worse for the industry is that Trump’s tariffs are hitting the parts of the world where oil demand is projected to grow in the near term. He has slammed six Southeast Asian countries with very high levies, including a 46% tariff on Vietnam and a blistering 49% tariff on Cambodia.
Those tariffs could slow or reverse those economies’ growth, dinging their hunger for oil. As of last year, Southeast Asia was projected to make up more than 25% of energy demand growth over the next decade, with oil demand alone projected to grow by 28%.
“The macro concern is that if these tariffs stay where they are, this is in a global recession, if not a depression-making place,” Johnson added. “And given that the highest tariff rates are on Asia in particular, and that’s where all growing oil demand is, it’s not good for oil.”
And that’s not all. The tariffs mean that the American oil industry is already paying higher costs for key industrial inputs needed to drill more wells. Drilling for oil and gas takes plenty of physical equipment — steel pipe, motors, condensers, valves, and more — and a large share of those goods come from overseas. Since Trump imposed a 25% tariff on steel and aluminum last month, drillers have watched the price of tubular steel pipe rise by roughly 30%, Johnston said.
“I think the tariffs have this demand hit, but there’s also this supply challenge. Particularly here in the U.S., the cost of doing anything or getting more investment is just skyrocketing,” Rachel Ziemba, a macroeconomic analyst and an adjunct senior fellow at the Center for a New American Security, told me.
“From a U.S. production standpoint, there’s this view that we weren’t going to see the same additional supplies out of the U.S. that President Trump and his team have been hoping for,” she said.
These three factors explain much of the current pandemonium. But Trump’s trade policies are also wreaking havoc in oil markets simply by making the global economy weaker. By slowing global trade, Trump will reduce demand for oil — regardless of any other effect that the tariffs might have.
“Oil is so integral to the global economy. You can try to carve oil out, and you can try to carve direct inputs for production out, but if you have these other tariffs that impact trade flows — well, trade means oil. You’re gonna impact shipping — that’s oil as well,” Arnab Datta, the managing director of policy implementation at Employ America, a nonpartisan think tank, told me.
The natural gas industry could also eventually pay for the tariff chaos. The countries and trading blocs most likely to import liquified natural gas — including the European Union, China, and the Southeast Asian countries — have also been hit hardest by the president’s trade levies. Natural gas companies have yet to announce a single new supply contract so far this year, Ziemba said.
It’s possible that the president eventually tries to secure a long-term LNG purchase agreement with countries as a way to wind down the tariffs, she added. During the first Trump administration, China agreed to buy a fixed amount of soybeans from the United States, although it ultimately made none of the promised $200 billion in export purchases.
So far, oil executives have praised the president or stayed silent, even as their shares have collapsed. But when given an opportunity to speak anonymously, they have slammed the administration’s policies.
“The administration's chaos is a disaster for the commodity markets. ‘Drill, baby, drill’ is nothing short of a myth and populist rallying cry. Tariff policy is impossible for us to predict and doesn't have a clear goal,” one executive told the Dallas Fed last month, before the most recent round of trade levies were announced. “I have never felt more uncertainty about our business in my entire 40-plus-year career,” said another.
One struggle for the fossil fuel industry — and for the broader market — is that the federal government has now lost credibility with global investors that it won’t pursue a reckless tariff policy in the future, Datta added.
“There’s no confidence they won’t change again,” he said. “How do we get out of this chaotic environment? I don’t think we can.”
“Energy dominance” has to start with energy reliability.
As we sat down to write this essay in mid-March, hundreds of thousands of people in Arkansas, Iowa, Kansas, and Texas were without electricity for days after heavy late-season snows and high winds took down power lines. Then just days ago, more powerful storms swept through the Midwest, leaving thousands more in the dark. Both events were stark reminders that America's grid is careening toward its breaking point.
“Energy dominance” is the Trump Administration's energy motto, which we interpret as producing enough reliable and affordable domestic energy to meet our increasing needs. We’re missing a piece of the puzzle. While domestic oil and natural gas production continues to rise, the U.S. electricity system is in decline.
After two decades of relatively level electricity consumption, demand is growing again. By 2050, our electricity needs are projected to nearly double, according to the Department of Energy. Advanced manufacturing plants, electric vehicles, and data centers processing artificial intelligence and cryptocurrency mining are among the major drivers of this growth.
A modern grid can restore power in minutes, meet growing manufacturing and AI electricity needs, and protect against cyberattacks. Our grid isn't prepared for this challenge. We lack sufficient high-voltage transmission lines to safely carry additional electricity to large-load consumers. Much of our existing infrastructure is outdated. Most of our grid was built in the 1960s and 1970s, approaching the end of its useful life. We continue to rely on lines across communities on wooden poles vulnerable to increasingly severe weather. While we've automated energy distribution systems for efficiency, this has made them more susceptible to cyberattacks.
Soon, activating a new data center might feel like a dangerous gamble. That area's grid could remain functional — or not.
America needs a national plan to rescue our grid. In February, we got together with more than 80 top energy experts, including former Secretary of State Condoleezza Rice and former Secretary of Energy Jennifer Granholm, for a meeting at Stanford University to explore how to meet critical U.S. electricity challenges. That meant coming up with ideas that were both technically feasible and politically palatable.
The resulting report outlines six big ideas for achieving an affordable, reliable, and secure grid:
1. Ensure American security remains at the heart of the nation’s energy strategy.
2. Advance a true all-of-the-above energy strategy.
3. Create a new federal and state grid investment trust fund.
4. Reform permitting processes to expedite grid infrastructure projects.
5. Promote and scale innovative, flexible grid policies.
6. Prioritize affordability through modernized utility operations and business models.
One place we drew inspiration is from the Highway Trust Fund, which has financed much highway construction and maintenance since 1956. A similar endowment dedicated to strengthening the grid could cover the costs of building additional transmission lines and renovating aging ones. Congress might consider financing this grid infrastructure trust fund with proportional contributions from the largest electricity users.
Such financing can succeed only alongside meaningful national permitting reform. New transmission lines are frequently delayed for a decade or more because states hesitate to issue permits. When developers seek to build transmission lines on federal lands, they face cumbersome environmental reviews that can halt projects entirely. Major permitting reform failed to pass Congress as recently as last year, but bipartisan negotiators can bring a successful bill to the floor in the current session.
Transmission lines are agnostic about the source of the energy flowing across them, and our energy policy should be the same. The keyword should be, as it has long been in many political circles, “all of the above.” We shouldn't undermine any energy source ready to deploy today. Few new natural gas, coal, and nuclear power plants can be constructed by 2030. In the near term, renewables and energy storage are more ready to deploy, and regardless of what is best, these are what utilities are relying on for the next few years.
We want technology companies developing the world's most sophisticated AI models in America. We want manufacturing plants building cutting-edge products in our communities. Producing enough energy to power these industries is fundamental to our national and economic security. If AI systems can enable new weapons development, support offensive cyber operations, or facilitate mass surveillance, we should oversee and regulate those systems within our borders.
New manufacturing plants are already creating good-paying American jobs while bringing supply chains for semiconductors and other critical technologies back home. Turning away these businesses because we can't meet their energy needs would mean surrendering our technological and economic advantage to overseas competitors.
Alongside drinkable water, clean air, and paved roads, Americans expect reliable electricity. We can build and repair our transmission systems while producing more energy. We can permit new high-voltage lines while supporting data centers and manufacturing plants. We can incentivize power production, simplify bureaucracy, and strengthen national security.
Our hope is that these six ideas spark a conversation about how we can rescue our grid and, as a result, our economic growth, technological leadership, and national security. Advancing them will require working across the aisle, across sectors, and in partnership across federal, state, and local levels.
Done right, America can fortify its transmission infrastructure against grid overload, natural disasters, and cyberattacks. Large corporate consumers would access the electricity they need, while homeowners and small businesses would enjoy reliable power from a modernized grid.
Congress can make our energy economy the envy of the world. The work starts by rescuing our grid.
