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“Drill, Baby, Drill”

The U.S. president is not God Almighty.

How’s that for an opening line?

It doesn’t matter if it’s a Republican president or a Democrat. He (or she) can only get so much accomplished.

With that in mind, I read an article from The Wall Street Journal with interest: “Trump Wants to ‘Drill, Baby, Drill,’ but Can He Cut Energy Prices?”

"Donald Trump says he can rapidly cut Americans’ energy costs by 50% or more,” the article begins. But while that’s:

… a welcome prospect for inflation-weary voters. It is easier said than done…

The Republican presidential nominee says he will rely on a favorite campaign slogan to accomplish the feat: Drill, baby, drill. Trump says faster permitting, weaker environmental regulations and other measures will unleash more production of oil and natural gas and push down prices at the pump and on electricity bills.

But Michael Webber, a professor of energy resources at the University of Texas at Austin the Journal quotes, calls Trump’s declarations “mostly just bluster, because the president actually doesn’t have any direct control.”

I understand what he’s saying and why. And I don’t expect Trump to wave a magic wand and make everything better.

But a second Trump administration would make a positive difference for American energy prices. Which, in turn, would be a welcome relief for consumers… and investors.

Presidents and Natural Gas

The Energy Information Administration (EIA) tells us that some 42% of America’s baseload power is generated by natural gas. So, when people talk about “energy,” they’re mostly talking about natural gas.

With that in mind, the following chart is instructive.

What you’re looking at is the spot price for natural gas at the important Henry Hub distribution facility in Erath, Louisiana. As far as investors are concerned, this is the spot price for natural gas.

The price of the commodity fell sharply leading into 2016. And – by and large – prices stayed low for the first three years of Trump’s presidency. To be clear, this was not entirely Trump’s doing. The fracking revolution got underway in the 2010s, resulting in lower commodity prices.

But, to Trump’s credit, he also didn’t look a gift horse in the mouth. If technology and innovation could deliver cheaper energy commodities, he went out of his way to make sure they kept coming.

Specifically, he expanded drilling permits and loosened the Obama administration’s standards concerning oil and gas companies. All put together, the U.S. became “energy independent” in 2019, producing more than it consumed.

As for the Biden administration…

  • One of Biden’s first executive acts in office was to rescind U.S. permission to build the Keystone XL pipeline across the U.S. – access that Obama had first denied and Trump then granted.

  • Biden wants to end gas-powered vehicle purchases by 2035, which is why he’s been incentivizing car buyers to purchase electric vehicles (EVs) and hybrids, and car manufacturers to make them.

  • Kamala Harris backs Biden’s energy policies.

We can disagree about what the right and wrong moves are between the two. But I think it’s more than obvious who the more pro-oil candidate is. And, for better or worse, it isn’t the current administration.

Build, Baby, Build

I greatly respect The Wall Street Journal and what it does. It’s a great resource for financial analysis.

It’s just that, in this case, I do take issue with some of its presentation.

For instance, the “Drill, Baby, Drill” article starts out by claiming that “many drillers don’t share Trump’s gusto for more drilling. They are more focused on returning cash to shareholders than on growing production.”

That’s the third paragraph, and it’s not completely wrong.

Contrary to what many believe, many energy producers actually like higher commodity prices. After all, higher prices make it more profitable to extract those same commodities. Lower prices do the opposite.

That’s one reason why, even under pro-energy policies, some gas companies and their shares seemed to struggle during the first three years of the Trump administration. Make no mistake: Lower energy prices are a gift to consumers, not producers.

Yet there’s clearly more to the oil story, as the article itself also states:

Many of Trump’s energy proposals are on the wish list of the oil-and-gas industry. And his agenda has helped attract millions in donations from oil tycoons. Trump has promised to make deep cuts at environmental agencies and issue faster permits and leases for drilling on federal lands, along with streamlined approvals for pipelines.

So which one is it?

I would argue both at the same time.

Oil companies have indeed been “cautious thanks to an uncertain outlook for the global economy and painful memories of past busts.” And with the Biden administration’s promotion of green energy, these producers are less inclined to spend the capital to build out new production capacity.

Yet they still acknowledge the need to, as this final chart shows:

Source: ExxonMobil

This shocking picture comes courtesy of ExxonMobil in its latest “Global Outlook” report. Without continued investment in oil and gas production, energy output could fall 70% by 100 million barrels to 30 million per day. For some context, the U.S. alone consumes about 19 million barrels per day.

What do we think that will do to energy prices?

Could the Exxon researchers be exaggerating for the sake of their industry? It’s always possible.

But we wouldn’t be surprised if these numbers are in the ballpark. And there’s absolutely no indication that global demand will fall fast enough to account for this shortfall.

Like it or not (and some people hate it), energy is the foundation for a modern economy. Do you want air conditioning? Data centers? Two-day Amazon deliveries? Or virtually any other modern convenience you can think of?

If so, what you really want is more energy.

And it’s time we understood that. So, whoever becomes the next (not God Almighty) president of the United States…

Drill, baby, drill.

Regards,

Brad Thomas
Editor, Wide Moat Daily