The ongoing trade turmoil, particularly stemming from President Trump’s trade war, is significantly impacting the U.S. oil industry. Nimble oil producers are reacting promptly by scaling back drilling operations, while larger companies are reconsidering their major investments. This short-term tariff tension could lead to lasting effects on the oil sector.
In the past 15 years, American shale drillers, especially those in the Permian basin, have transformed the oil market, making the U.S. the world’s leading oil producer. However, these producers now face challenges. According to a recent Dallas Federal Reserve Bank survey of about 130 producers, they require oil prices between $60 and $71 per barrel to sustain production expansion.
Currently, the benchmark U.S. oil price is at $63 per barrel, having dropped by 9% since Trump announced tariffs on April 2. The imposition of tariffs on steel and drilling equipment is projected to elevate breakeven prices further, discouraging drilling of new wells. This price decline is already reflecting in the drilling activities, with reports indicating that oil rig numbers fell significantly, marking the most considerable decrease since June 2023.
Smaller firms, which are more sensitive to price fluctuations, are adjusting quickly, whereas larger companies like Exxon Mobil and Chevron may utilize their financial robustness to navigate through the volatility. Nonetheless, given the recent price drop and market instability, even these large firms may limit their focus to the most profitable areas of their shale assets. The International Energy Agency recently revised its forecast for U.S. shale oil production growth in 2025 down by 70,000 barrels per day, anticipating total U.S. crude output at 13.48 million barrels per day.
The actual growth will be largely determined by the trade war’s trajectory and its influence on oil prices. A sustained period of low prices and uncertainty is likely to significantly reduce industry activity. Beyond immediate production shifts, the longer-term outlook carries more weight.
Uncertainty about future profitability is causing industry executives to slow investment decisions, especially regarding large-scale projects that require substantial time and financial resources. Various producers are facing severe overhead commitments regarding dividends and stock buybacks, which complicates their financial flexibility. For instance, Exxon would need an oil price of $88 per barrel to fulfill such commitments, while Shell requires $78 per barrel.
This precarious situation suggests that the current uncertain climate will hinder companies from making significant investments. Delay in substantial projects crucial for future production can tighten markets later on, leading to potential backlogs and more volatility once prices rebound. Consequently, the turbulent global economic environment may inflict not just short-term setbacks but profound, enduring repercussions on an already uncertain industry landscape.