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Donald Trump’s campaign promises include two key, yet somewhat contradictory, policies: imposing tariffs and reducing inflation. Tariffs can raise the cost of imported goods in the U.S., potentially increasing inflation and creating a “re-inflation risk” for the American economy. However, there is one way Trump could aim to achieve both goals: by heavily promoting the oil and gas industry.
Some forecasts suggest that a rebound in demand following interest rate cuts, combined with Trump’s proposed tariffs and tighter immigration policies, could raise the U.S. inflation rate by 2.3 to 4.1 percentage points by 2025. Nevertheless, if a Trump administration were to rapidly relax restrictions on oil drilling, driving oil prices down to around $50 per barrel, this could potentially lower U.S. inflation by 1.2 percentage points.
The United States has abundant oil and natural gas resources. With about 1.66 trillion barrels of recoverable oil resources, the Institute for Energy Research (IER) reports this could last 227 years at current consumption rates. Additionally, the U.S. has 40.3 trillion cubic feet of technically recoverable natural gas, enough for 130 years.
Since President Biden took office, there has been a curtailment in domestic oil and gas exploration and development. In contrast, the Trump administration supported reliance on traditional energy, notably increasing shale oil production during his term. Expanding the oil and gas industry is a central component of Trump’s campaign promises. In July, Trump announced at the Republican National Convention that he plans to significantly boost oil production to cut energy costs and reduce inflation if re-elected.
However, there is a significant issue with this strategy.
New supply cannot be achieved overnight. Developing new mines or oil and gas fields is a lengthy process, often taking more than ten years. Furthermore, discovering new fields is becoming more challenging, and the costs and complexity of development are increasing. Years of underinvestment in exploration will further delay the timeline for new supply to come online.
Over the past eight years, average cumulative spending on oil and gas exploration has decreased from $10 billion to $7 billion, and the discovery rates in the oil and gas industry continue to fall. According to Rystad’s latest report, 2023 saw a record low in new proven reserves. Aatisha Mahajan, Vice President of Rystad Energy, notes that upstream oil producers are facing uncertain times.
A supply shortage is looming.
A report from Western Australia’s Department of Energy and Mines indicates that developing a new oil field typically takes at least ten years. This includes applying for production permits, negotiating compensation agreements with landowners, conducting feasibility studies, and securing financing. Given the regulatory obstacles new oil and gas projects face, a decade-long development timeline might be optimistic, even limited to already discovered deposits.
So, what’s the solution?
In short, it’s unlikely that significant new supply will enter the market during Trump’s tenure. What makes matters worse, according to Goldman Sachs, is that oil demand is expected to rise significantly over the next decade, putting more pressure on existing fields. The investment bank predicts that economic growth in Asia will drive global oil demand up by about 1.1 million barrels per day by 2034. Meanwhile, capital expenditures by the world’s six largest oil producers, including ExxonMobil and Chevron, have decreased by approximately $3.8 billion this year.
Undoubtedly, the reluctance to invest in new projects is driven by the global push for green transition, leading to a withdrawal of capital from oil and gas exploration and development. If Trump is re-elected, new oil and gas developers might find it easier to obtain approvals. However, realistically, that’s about all Trump can do. This alone will not substantially increase global supply.
As reflected in prices, this means that oil prices might likely rise rather than fall in the coming years.
