Donald Trump’s inauguration later this month is almost unanimously believed to bring in a new era in U.S. energy policy—an era of pro-oil and pro-gas regulation aimed at boosting the country’s production and exports, in line with Trump’s energy dominance agenda. However, this belief may yet get shattered by factors outside the president-elect’s control.
There have already been signs that the oil and gas industry itself is not really on board with a rerun of the “Drill, baby, drill” movie that the shale revolution made. The industry seems to have advanced to the stage of financial discipline and shareholder returns and is not going back to the stage where the ultimate goal was to see just how much oil and gas they could get out of the ground. Then there are the oil and gas themselves.
Reports about depletion in the shale patch are beginning to emerge increasingly often. This does not mean that production is about to peak anytime soon because there is still plenty of oil and gas in the shale plays. But, according to Energy Aspects, this production is changing, and it is changing in such a way as to make U.S. oil less relevant to global oil prices.
In an op-ed for the Financial Times this week, Energy Aspects’ co-founder and director of research Amrita Sen said that U.S. oil producers were unlikely to feel like boosting production considerably because their breakeven had gone up in the past four years. She also said that hydrocarbon production was getting gassier in the shale patch, and this was going to affect the U.S. total in oil.
The observation is not new or unique. Reuters last year reported that crude oil pumped in the Permian was getting lighter, which could affect demand for it negatively. Citing unnamed sources, the report said the gravity of WTI had gone up from between 38 and 42 to between 41 and 44. This could reduce demand for the blend among refiners because the lighter the oil, the more heavy crude it would need to be mixed with at refineries in order to make the same fuels as before.
The gravity situation is unlikely to change much because the pool of untapped shale resources has shrunk over the past decade. “There just aren’t enough untapped barrels on hand for this rate of output,” Sen wrote, adding that because of this state of affairs, there was nothing the Trump administration could do over the next four years to add the amount promised by Trump’s Treasury Department nominee, Scott Bessent. Bessent has claimed the U.S. could add 3 million barrels in daily oil production over the next four years as a means of reducing government deficit.
The idea was slammed as unrealistic almost immediately for various reasons, including oil drillers’ unwillingness and lack of financial incentive to drill a lot more than they are already drilling. Yet the fundamental element of resource availability is perhaps a more important factor. If oil in the shale patch is getting lighter, and gas as a portion of the total hydrocarbon output is increasing, there would indeed be challenges in further strong U.S. oil growth. This would affect global prices since WTI is now part of the Brent benchmark. The effect, most likely, would be bullish overall, as the assumption that whatever OPEC does, U.S. drillers will produce more barrels is proven wrong by natural processes in the patch.
Yet at the same time, the effect of the changing properties of U.S. crude could push down the price for Brent as demand for one of its constituent blends declines due to the related hassle of blending it with more heavy grades. And that would make drillers even less willing to invest in strong production growth. It is a process as natural as well depletion.
It is because of these natural processes and the lack of financial incentives that Energy Aspects has a rather conservative forecast for U.S. oil production growth over the next four years. That forecast is for 400,000 bpd total growth, or 3% from current levels. It is not alone in its conservatism, by the way. JP Morgan expects oil output growth of 3.6% over the next five years, to a total 13.5 million barrels daily. That’s down from a growth rate of 13.4% between 2022 and 2024.
On the flip side, increasing gas production should quench worries that growing exports would lead to higher gas prices at home. If production rises fast enough, there should be plenty of gas to both export and use at home amid the surge in electricity demand expected to come from data centers and AI. Expansion in LNG export capacity would help the production boost, too, Sen noted in her op-ed, forecasting an increase of over 10 billion cu ft daily in the period to 2028, along with growth of 600,000 bpd in natural gas liquids, for a total gas output growth of 2.7 million barrels of oil equivalent. Oil may be on the decline, but gas is on the climb.