Drill, Baby, Drill (or Not)

This phrase saw a lot of action on the campaign trail and even during the inaugural address by Donald Trump. Coined in 2018 by Maryland Lieutenant Governor Michael Steel during the 2008 Republican National Convention, Sarah Palin also used the phrase during her vice-presidential debate against Joe Biden that same year.

President Trump seeks to boost domestic oil production to lower the cost of crude and the price at the pump. This weekend Trump enacted 25% tariffs on Canada and Mexico, and an additional 10% on China. The Canadian tariffs will only include 10% on energy products.

So this means that oil prices are going to come down?

Not likely. It is great to implore big oil to produce more product, but based on current data from the U.S. Energy Information Administration, domestic oil production is already at record levels, producing around 13.2 million barrels per day in 2024.

Domestic crude oil prices have generally stayed under $80 per barrel since early 3Q24 despite some geopolitical shocks in the Middle East, even dipping below $70 per barrel at times. Short of any other shocks to the energy market this year, prices were expected to stay below $80 per barrel before considering any tariff impacts. With the US producing at record levels, non-OPEC+ countries increasing supply by 1.5 million barrels per day, and a weaker than expected demand from China, there is no upward pressure on oil pricing.

Even if big oil wanted to drill tomorrow, they wouldn’t. Oil companies plan out their drilling and production years in advance to ensure their fields maximize production. To drill a new modern shale well it can take up to six weeks, but if you are drilling offshore it could take you a year and cost you a lot more. After drilling, it can takes more time to frack and add production piping. Then there is permitting and infrastructure (pipelines and storage) to consider. On average, it takes five and half years from discovery to first production, and an average of 17 years to get to peak production.

But wait, there’s more!

Exxon Mobil and Chevron have announced that their profits in 2024 fell by 6.5% and 17% respectively. According to the Dallas Fed, 43% of oil and gas executives say the plan to keep their capital expenses and either at the same level or lower in 2025 with prices falling along with revenue and profits. What incentive do they have to produce more oil when their margins are falling?

With the new tariffs on Mexican and Canadian oil this should help American oil production?

Not so fast. The US imports about 4 million barrels per day from Canada and 850,000 barrels per day from Mexico. The Midwest processes Canadian oil and the Gulf Coast processes Mexican oil. The Midwest doesn’t have the flexibility based on geography of seeking another source of crude, unlike the Gulf Coast. This will further strain the East Coast refineries who won’t be able to keep up with the demand since the swing supplier at peak times to the East Coast is a refinery in New Brunswick, Canada which will be subject to the tariff. The other option is importing from Europe, which comes at a cost as international shipping costs remain elevated.

Another complicating factor is that each refinery is designed to handle the unique aspects of oil sourced from different areas. Some oil is lighter or more viscous, some is heavier, and other oil is a lower grade and requires extra processes to refine.

How long should we expect these tariffs to be in place?

Tough question.

The tariffs are expected to be lifted once measured reductions are realized in fentanyl related deaths and migration and criminal activity. There were no metrics provided around what would constitute an adequate decrease.

Likewise, how will the Trump administration react to any retaliatory tariffs set in place by either Mexico or Canada (or other countries). It is hard to predict what happens next here.

What does this mean for construction?

98% of construction equipment runs on diesel, which is best refined from Brent Crude. Brent Crude runs at a $5 to $10 per barrel premium. Don’t expect to see prices at the diesel pump go down, but don’t expect to see them skyrocket either.

Expect that shippers will pass along fuel costs to the end user through price announcements with fuel surcharges like we saw a couple years ago.

Remember that oil and gas companies will have a similar concern around natural gas (which could be another separate blog post), which is more volatile around the weather for production and consumption. In general, any increase in energy costs will drive up the cost of raw and manufactured materials that will get passed along to the project.