BY RON BOUSSO
LONDON—Nimble US oil producers are responding quickly to the economic turmoil sparked by President Donald Trump’s trade war by slowing down drilling activity, while larger companies are rethinking big-ticket projects. This means short-term tariff drama could have long-term consequences for the US oil industry.
American shale drillers, particularly in the Permian basin, have upended oil markets during the past 15 years, catapulting the United States into its current position as the world’s largest oil producer.
But they are now running into an impasse. These technology-driven frackers require a relatively high oil price to expand production, between $60 to $71 a barrel, according to a recent survey of 130 producers conducted by the Dallas Federal Reserve Bank.
The benchmark US oil price currently sits at $63 a barrel, following a 9 percent drop since Trump’s tariff announcement on April 2. And the gap is most likely even wider than it initially appears because the imposition of 25 percent tariffs on steel and 10 percent levy on other drilling equipment will almost certainly push up breakeven prices.
This means many new wells will simply not be drilled.
The dramatic price decline already appears to be affecting drilling activity. Drillers reduced the number of oil rigs employed in the week to April 11 by the most in any week since June 2023 to 583, energy services firm Baker Hughes said in its closely followed report.
The short-cycle nature of fracking means these producers are the best positioned to respond quickly to oil price swings. Smaller firms tend to be the most sensitive to price changes, while larger shale producers such as Exxon Mobil and Chevron can use their large balance sheets to weather volatility.
But given the extent of the recent price decline and the scale of the volatility, even the large players will probably retrench to the most profitable acreage within their vast shale positions.
The International Energy Agency this week reduced its forecast for growth in US shale oil production in 2025 by 70,000 barrels per day to 260,000 bpd to bring total US crude output to 13.48 million bpd.
The actual growth figure will, of course, depend on how the trade war unfolds and its impact on oil prices, but a sustained period of uncertainty and low prices would certainly be expected to drive activity sharply lower.
But much more meaningful than any short-term shifts in oil production is the heightened uncertainty over the long-term outlook that is quickly setting in among industry executives, as it will almost invariably lead to boards slowing down investments.
This should have a particularly lasting effect on companies planning to invest in large oil and gas projects such as offshore fields that take years to develop and cost billions of dollars. Boards are expected to decide on more than 60 such large-scale upstream oil and gas projects this year and next, according to consultancy Wood Mackenzie.
These projects would require oil prices of $42 a barrel, on average, to generate profits. At first glance, this suggests most of these projects could be cleared to go ahead with Brent crude near $65 a barrel.
But the calculus is a bit more complicated. Leading oil and gas producers from Exxon and Chevron to Shell and TotalEnergies have significant overhead spending commitments to investors in the form of dividends and share repurchases, which have been the backbone of their investment proposition in recent years.
