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.”
