Drill Baby Drill Is Not What You Think It Is
Since Trump won the election, I've seen numerous bad takes on Trump's energy policies. This is especially the case when it comes to his policy of boosting domestic US oil production, "Drill baby drill."
Reality
US shale, namely the Permian, single-handedly saved the world from what would have been a structural oil supply deficit back in 2016, but it won't be able to repeat its success this time around.
What people fail to understand is that while the Federal government could provide tax breaks on capital investments and expedite infrastructure build-out, US shale production has matured and the Permian is not what it used to be. Producers with tier 1 acreages have to manage the long-term value of the assets and this means a slow-and-steady approach to tackling the remaining inventory.
Unlike the old shale days when the name of the game was to grow as fast as you can and sell out, consolidation has already taken place across the US shale patch. With the remaining inventory in the handful of large players, resource management is now the name of the game. There's a reason why producers like Pioneer Natural Resources sold out to Exxon. For all of its criticisms over the years, Pioneer possessed some of the best acreages in the Permian, and Scott Sheffield maximized the long-term potential of the company and gave shareholders an even longer growth horizon (via Exxon's stock).
Another prime example is Diamondback Energy, one of the remaining pure-play Permian producers. In its latest earnings release, it emphasized its previous commitment to keeping production flat. Instead, Diamondback, following its historic acquisition of Endeavor, continues to focus on cost-cutting and operational efficiency improvements. The improved efficiencies should translate to lower costs and higher free cash flow generation, which will be directed toward shareholders.
But aside from the fact that producers themselves are telling you that growth will be muted, the reality is that Permian is a maturing basin, and producers are increasingly contending with the issue of a higher gas-to-oil ratio. EIA published a good piece on this here.
While this doesn't necessarily prevent oil production from increasing, it makes it much more difficult to get the strong oil production growth of the past. This is another reason why if you look at our real-time US oil production data, US oil production growth has stalled meaningfully since 2022.
