Trump and Harris have the same oil problem

There was little daylight between Vice President Kamala Harris and ex-President Donald Trump in their presidential debate this week when it came to fossil fuels. Trump warned that if he loses the election, “oil will be dead,” while Harris touted overseeing “the largest increase in domestic oil production in history,” and said more investment was needed to “reduce our reliance on foreign oil.” The trouble is, the market isn’t asking for more drilling — and pushing for more exploration than the market wants is a recipe for disaster for oil companies.

It’s typical for presidential candidates to make promises on energy that are outside their power to deliver. But the difference between those promises and what oil companies will be willing and able to deliver is especially wide this year. China’s economic indicators are grim, and that’s especially a problem for US producers, which depend on foreign exports as their only viable opportunity for growth outside the well-supplied domestic market. OPEC has barely managed to hold the line on sticking to relatively low production quotas, and would need to cut even deeper to avoid an oversupply next year, Citigroup analysts said this week. Warring factions in Libya appear close to an agreement that would allow the country to restart drilling.

Put it all together, and some analysts see global oil prices falling as low as $60 per barrel next year, which would be below the average price US producers need to break even.

That’s where Harris and Trump run into a key oil market paradox: The interests of consumers and oil executives aren’t the same. Reducing gasoline prices is a priority for both candidates. Increased crude production could help. But the more prices fall, the less willing oil companies are to invest in drilling. Production reached the current record levels as companies chased higher prices in the post-pandemic economic recovery. But energy firms are under intense pressure from their shareholders to pull back on capital spending and return more profits to investors. The candidates’ preferred policy — boost drilling investment even though it will probably cause prices and profits to fall — is exactly the opposite of what shareholders have been begging for. Unless market signals improve, that tune is unlikely to change. As for the election, oil industry advocates should be cautious about the “drill, baby, drill” mentality, University of Houston oil economist Ed Hirs told Semafor.

“A bunch of oil executives here in Houston say, ‘I’m not gonna vote for Kamala, she won’t be good for the oil patch.’ Well, the price of oil has been about $75 a barrel, and under Trump, it was closer to $40. Now tell me who you like,” he said. “Be careful what you wish for!”

Although OPEC also recently cut its demand growth forecast for next year, its estimate remains more than double that of the IEA. Fears of an oversupply could prove unfounded if China’s economy manages to bounce back. Cuts to US interest rates could help boost domestic demand. And despite Harris’s pro-drilling stance in the debate, her administration would still be more likely than Trump’s to pursue environmental regulations and leasing restrictions that would impede opportunities for increased production.