By Arathy Somasekhar
HOUSTON Reuters) – President Donald Trump moved on his first day in office to increase U.S. oil and gas production, but the country’s oil industry is actually starting to think about cutting output and jobs due to a double whammy of higher crude output from OPEC and on-again, off-again tariffs that have dented demand.
The U.S. is the world’s largest oil producer, pumping some 13.55 million barrels per day, employing millions of workers and generating trillions of dollars annually. Trump campaigned on the motto of “drill baby drill,” and the national energy emergency he declared on his first day of office was designed to make it easier for companies to increase production, while he instructed officials to do everything they could to bolster the industry.
Instead, the market has been rattled by a steep slump in U.S. crude futures to near $55 a barrel this month from about $78 the day before Trump was sworn in. Many companies say they cannot drill profitably if oil prices fall under $65 a barrel.
New tariffs will make it more expensive to buy steel and equipment, industry watchers said, which could further discourage drilling unless oil prices rise substantially.
Oil markets, along with Wall Street, began a free fall on April 2 when Trump announced the new tariffs on trading partners. Shortly after, the Organization of the Petroleum Exporting Countries and its allies in OPEC+ said they would accelerate output hikes, pushing U.S. oil prices to their lowest levels since pandemic lockdowns crushed demand.
The U.S. Energy Information Administration sharply cut its estimate of U.S. crude prices to $63.88 per barrel for 2025 from a prior forecast of $70.68 a barrel, citing global trade policy and higher OPEC production. Global oil consumption for 2025 will increase by 0.9 million barrels per day (bpd), 0.4 million bpd less than EIA’s prior forecast, the EIA said this week.
Even before the tariff-driven price fall this month, top companies including Chevron and SLB had announced layoffs to cut costs.
“If prices get sub-$60 and stay there, we’ll see a definite drop in the rig count,” said Roe Patterson, managing partner of Marauder Capital, a private equity firm investing in U.S. oilfield services sector.
“They’ve definitely opened the door for the OPEC countries to gain market share here, and it’s an inadvertent, self-inflicted wound,” Patterson said.
“It was counterintuitive for the administration to think that oil companies would ‘drill, baby, drill’ when prices were lower,” he added.
The U.S. oil rig count stood at 506 at the end of March, down by 382 rigs since 2018, which was the peak in the last decade.
“If oil prices stay in the $50s, oil rig counts will drop, and the drop could be more than just 10%, or 20%. If it settles around $50 for a while, I wouldn’t be surprised to see the count drop by 50%,” said Cam Hewell, president and CEO of Premium Oilfield Technologies, which manufactures and sells equipment that enables oil companies to drill wells faster.
BREAKEVENS CHALLENGED
Oil producers need a price of $65 per barrel on average to profitably drill, according to a Dallas Federal Reserve Survey of over 100 oil and gas companies in the Texas, New Mexico and Louisiana region. That was a dollar higher than the price they quoted in last year’s first-quarter survey.
Average break-evens, or the cost of developing a new well in the U.S., were just under $48 a barrel, according to research firm Rystad Energy and Wood Mackenzie. Break-even rises to over $60 a barrel once dividend payments, debt repayments, corporate expenses and other costs are included.
“In reality, even a company operating on $40 breakeven acreage would be inclined to slow down activity when prices fall below $65 per barrel, as their level of dividend coverage would be at risk,” said Matthew Bernstein, a vice president at Rystad.
Many publicly traded companies have focused on capital discipline and shareholder payouts over growth in recent years after investors fled the sector due to years of weak returns.
While it may cost under $40 a barrel to drill in the best parts of the Permian basin, new well drilling in North Dakota – the third largest oil-producing state – would require oil prices around $57 a barrel, according to Wood Mackenzie.
Operations in those basins would be more at risk at current price levels, according to industry executives.
While break-even costs have eased from a high of $54 in 2024 thanks to efficiency gains, they were still about $15 higher than the lows touched during the pandemic when oil service costs fell.
The average price to cover operating expenses for existing wells, or the price below which companies will look to shut in production, was about $41 per barrel, up from $39 last year, according to the Dallas Fed Survey.
“If oil does go into lower $60s (a barrel), or upper $50s, public independents that are already capital disciplined are going to have to cut their budget and cut rigs,” said Bryan Sheffield, founder of energy investors Formentera Partners and former chief executive of producer Parsely Energy Inc.
INPUT COSTS RISE
Meanwhile, well costs are likely set to climb due to tariffs on steel, as well as goods from China, a supplier of many key parts used in drilling rigs and equipment.
“For the parts that we get from China, we have started adding a line item in our invoices to account for the 20% tariffs and largely expect to pass it along to our customers,” said Hewell, adding that rapid hikes and variations in the tariffs imposed were making the process hard for the company.
While companies have brought down some of the costs to drill wells by reducing drilling time and fracking multiple wells at the same time, those gains are expected to be limited.
“We may get a little more efficient and faster, but I think the ‘large leaps’ in efficiency and technological improvements have been generally accomplished for now,” said Marauder Capital’s Patterson.
(Reporting by Arathy Somasekhar in Houston; Editing by Liz Hampton)
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