“Drill, baby, drill.” This is the pithy phrase used by the new president of the United States, Donald Trump, to express his vision of American oil policy. He clearly stated that his objective was for the country to produce as much oil as possible in order to reach a price of $50 per barrel. He has even set his target at 16m barrels per day by the end of his term, compared with 13m barrels per day at present. This new doctrine contrasts with that of his predecessor, Joe Biden, whose aim was to reduce the use and exploitation of fossil fuels. However, his political voluntarism, illustrated by the fact that it has become more difficult for oil companies to obtain drilling permits, has not prevented the United States from becoming the world’s leading producer and increasing production by 2 mbpd under Biden’s term in office. So it seems that political announcements do not always match reality. Will the same be true of Trump? Is it possible for the US oil industry to increase production by 3 mbpd in four years?
High operating costs
The first condition for achieving such a level of production is that producers have an interest in increasing their output, and this depends on the additional profit they can make when they sell their one extra barrel. One specific feature of American oil is the heterogeneity of operating costs. In the Permian region of Texas, where 6m barrels of oil are produced, the average cost is around $30 a barrel, ranging from $10 a barrel to $60. Throughout the United States, some wells have an operating cost of $90 per barrel. In conclusion, the average cost is around $35.
By comparison, in Saudi Arabia, the average cost is around $5. Consequently, more abundant production in the United States, which would have a negative impact on the price--which is what Trump is seeking--would have the effect of excluding American production with a production cost of more than $50, which would cause production to fall back. The US oil industry is characterised by a very large number of wells that produce little and for a short period of time, compared with other major producers.
We can make the same observation: the break-even point for opening a new well in the United States is much higher than in its main competitors, averaging $65 per barrel compared with around $20 in Russia. As a result, increasing the number of active wells is likely to prove very difficult. Finally, another specific feature of US production is the existence of drilled but unexploited wells (duck wells). These wells make it possible to rapidly increase production at a lower cost, but at present the number of duck wells is historically low, at just over 4,400 units.
A complicated strategy to implement
In conclusion, it is therefore unlikely that American producers will be inclined to increase their production significantly in view of their costs. What's more, a reduction in these companies’ costs also seems unlikely, given that around 4% of the sector’s employees are undocumented migrants in the United States. Consequently, the policy of reducing immigration and removing undocumented workers is likely to put pressure on the labour market and push companies to offer more attractive wages, which should lead to cost increases and therefore make it difficult to reduce production and extraction costs.
It would therefore appear that the strategy of sharply increasing production and gaining international market share, or of achieving total energy independence as claimed by the new president, cannot be achieved without a price in line with production costs. However, it is difficult to imagine today that a price of $50 a barrel, as desired by Trump, is in line with production of 16m barrels a day. To achieve such an objective, the government would have to subsidise oil producers in one way or another, which would ultimately mean making taxpayers pay, either through higher taxes or increased debt.
This article was originally published in .