The profitability issue of “Drill, Baby Drill”

In theory, the Trump energy policy of “Drill, Baby Drill” sounds good. Pump more and prices fall. Less inflation and US consumers have more money in their pockets. But there is a profitability factor that may not add up for US oil and gas producers – and they aren’t going to forget what happened in 2015 when crude oil prices tanked from over $100 a barrel to under $30 between 2014 and 2015, while production ramped up for over a year.

US crude oil production vs price

12/31/2010 to 12/31/2016

Source: Bloomberg

Kansas City Federal Reserve’s Q42024 survey of US exploration and production companies indicates drilling new wells is profitable at an oil price of US$62/bbl or a natural gas price of US$3.69/MMBtu. Crude Oil WTI is around US$75/bbl in late January, making drilling for oil modestly profitable. Natural gas is around US$3.75/MMBtu, which is barely breaking even.

The US is already the largest oil producer and natural gas exporter in the world. Oil companies are not going to pump more if prices fall to a point where it becomes a loss-making endeavor.

Most oil and gas production in the US occurs on private lands. Thousands of leases are already held to drill on federal land that are not being used. Therefore, making more public lands accessible for drilling probably won’t move the needle.

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