Donald Trump has promised to give the U.S. energy industry a boost as president, bringing back jobs and keeping our energy investment here at home. That's a great concept in theory, and if he's right it's something investors in the energy sector should take very seriously. But there's also the reality of energy, both in the U.S. and as a global commodity.
Today, I'd like to look at U.S. oil production, imports, and how the president could actually help make the country independent of foreign oil. And how that compares to the power OPEC holds in the market.
The truth about oil imports
The U.S. has been a net importer of oil for decades, which has long been a hot topic in politics and the media. What you may not know is that imports have been on the decline since 2006, and have dropped by about 60% since their peak a decade ago.
The two main drivers of the decline in oil imports have been the rise in U.S. oil production and a decline in oil consumption. That's right -- U.S. producers are not only producing more oil than a decade ago, people are using less oil on a day-to-day basis.
How to boost U.S. energy production
If the U.S. wants to increase oil production, the strategy is simple: Raise oil prices.
You can see in the chart below that oil production rose rapidly between 2011 and the end of 2014, only for production to start to wane when oil prices plunged. The drop in production wasn't driven by regulations, it was Economics 101. When prices fall, oil producers stop drilling.
What you may forget is that the decline in oil prices was driven by OPEC's reaction to the boom in U.S. oil production. OPEC didn't like the idea of losing market share, so in 2014 it decided not to cut production to boost oil prices, squeezing U.S. oil producers. And with 31.8 million barrels of oil per day coming from OPEC countries in 2015, compared to just 9.4 million barrels (and falling) coming from the U.S., OPEC has a lot of power to control U.S. energy production.
Continental Resources (NYSE:CLR), which is run by Trump advisor Harold Hamm, is a perfect example of how oil companies react to OPEC and how oil prices drive U.S. oil production more than politics. In 2014, when oil was last over $100 per barrel, Continental Resources had a capital expenditures budget, mainly spent on drilling, of $4.55 billion. With oil in the mid-$40s per barrel, its 2016 budget is down to $920 million. And the company pointed out many times in its capex announcement that oil prices are what will drive a financial improvement for the company.
If any political candidate wants more U.S. oil and fewer imports, a plan should start with raising oil and gasoline prices for everyone. If history is any indication, asking OPEC to cut production might be the best strategy.
How to get drivers to drive less
The other factor driving oil imports is the level of consumption. To get U.S. consumers to use less oil, the strategy should be simple (and familiar): Raise oil and gasoline prices.
In the early 2000s, gasoline cost about $1 per gallon and oil traded at about $20 per barrel. But between 2005 and 2014 oil rose to over $100 per barrel, and gasoline over $4 was commonplace. Over that same decade, as prices rose, consumers bought more fuel-efficient cars and used less gasoline. In fact, U.S. oil consumption declined 8.2% between 2005 and 2014. It's only in the last two years as gas prices have declined that consumption has risen again.
Once again, supply and demand drives consumer behavior. If there's cheap oil, people use more oil and imports rise. If oil and gasoline are expensive, they use less and imports fall.
Why more U.S. oil has a major downside
You can probably see a theme emerging here. Energy investors can't count on an election to save their investments. Any political candidate who wants more U.S. oil production and fewer oil imports will have to put policies in place that would raise oil prices, and thereby gasoline prices, dramatically. There's simply no other way to accomplish the goal.
Raising prices would most likely involve heavy tariffs on oil imports, which would then be passed onto consumers in the form of higher prices. Outside of that, it's market forces at work in energy markets. And they're not something any president can control.
The real power in energy prices
What's been established in the last two years is that it's OPEC that's really in charge of oil prices, and Saudi Arabia in particular, because they have much lower production costs than U.S. shale drillers like Whiting Petroleum (NYSE:WLL), Continental Resources, Devon Energy (NYSE:DVN), or EOG Resources (NYSE:EOG). OPEC may not be able to control its members well, but last month just the hint that OPEC would cut oil production sent oil prices soaring. That's far more power than the president has to control energy prices.
Remember the sheer scale of OPEC compared to the U.S. in the oil industry. OPEC produced 31.8 million barrels of oil per day last year, more than triple what all U.S. drillers produced. In a global commodity like oil, the power lies with OPEC.
Does the U.S. really want more oil production?
It may be easy to think that politics can solve problems in business, particularly in the energy industry. But the reality is that economics drives the oil industry far more than political rhetoric would indicate, something investors should keep in mind.
If any candidate wants to unleash U.S. oil production, it'll have to be accompanied by rising energy prices for consumers. For investors, it'll be necessary to think about how likely that trade-off is to happen and whether higher oil prices are more likely to be driven by Washington or OPEC. The hard truth is that OPEC has a lot more power in the oil industry than the president, no matter who the president is.