Geology and pipelines set limits on Trump’s ‘drill, baby drill’

US oil and natural gas production is already at record levels. Can a ‘drill baby, drill’ policy move the energy needle? The Trump administration’s ambition to increase energy production faces geological constraints. Any effort to increase US gas production is further limited by current infrastructure, with implications for European economies that have switched their gas dependence from Russia to the US over the last three years.

The Trump administration is promoting US fossil fuel production by reducing environmental regulations, accelerating drilling permits and opening up federal land for oil and gas extraction. One of the President’s first executive orders was to declare a national emergency to facilitate these measures, with the stated aim of lowering domestic and global oil prices. He has also scaled back renewable energy initiatives and pledged to withdraw the US from its international climate agreements.

Last month, President Trump outlined his expectation that a lower world oil price would undermine Russia’s financial reserves, in a comment linked to the war in Ukraine. While he has no means to directly change the global market, following through on a commitment to refill the US strategic petroleum reserve would stimulate demand and US drilling activity. More exotic US measures, for instance, direct subsidies for output seem unlikely at this stage, but cannot be ruled out. Oil prices were falling before President Trump’s speech on 23 January and the cost of crude has continued to decline since. Oil producers are estimated to respond to a price of around USD 80 per barrel to incentivise the investments needed to create additional output. ,Brent crude reached a mid-January high of USD 82 per barrel, and the benchmark oil price is now USD 75 per barrel.

US oil production in 2024 was 13.5 million barrels per day (bpd). Market consensus is for a geologically-constrained peak output of between 14 and 16 mbpd, some time before 2030. To produce 15 mbpd in that timeframe implies additional growth of around 300,000 bpd per year. That is less than the 600,000 bpd added on average between 2016 and 2023. Saudi Arabia, the world’s second-biggest producer, does have significant spare capacity. If that were brought to the world market, perhaps as a result of US diplomatic pressure or in exchange for harsher sanctions against Saudi’s regional rival, Iran, prices might drop into or below the USD 60-to-USD 70 range. But OPEC+ (the Organization of Petroleum Exporting Countries, plus Russia, Kazakhstan, Mexico and Oman, among others) would, given a choice, prefer higher prices to higher volumes, in our view. Our 12-month Brent crude price target is USD 65/barrel.

Any slowdown in US oil production growth would shift the burden… back to OPEC+

Any slowdown in US oil production growth would shift the burden of supplying the still-growing global oil market back to OPEC+. That could pressure oil prices to temporarily rise before declining to 60 USD by year-end. Demand remains robust, and China, where the economy is expected to grow at more than 4% in 2025, is still the world’s biggest oil importer.

Could the Trump administration’s planned tariffs on Canadian imports affect flows? The US imports around 4 million bpd of Canadian crude and refined products, or around one fifth of its total demand. But while tariffs on Canadian energy may prove inflationary for US motorists, particularly in the Midwest, we do not see a dramatic impact on global oil prices, as world supply and demand would not meaningfully change.

Read also: Trump’s policy priorities don’t yet shift outlook

Infrastructure limits US natural gas

The limitation on US natural gas production is a different story. Here the constraints on higher US output are not geological but about the infrastructure of pipelines in place. US natural gas export pipelines converge on the Gulf of Mexico, and are close to capacity. There is additional production capacity in the Appalachian region, but not the infrastructure to deliver it. This constraint matters because cheap natural gas underpins US economic manufacturing competitiveness, as it provides a third of US primary energy, compared with one-fifth in the European Union, where natural gas is more expensive.

We expect power demand to rise quickly, even if AI advances lead to major energy efficiencies

In the US, as much as half of the anticipated increase in power demand is driven by datacentres handling rising computing demand. While the technological landscape around the power needs of artificial intelligence and cloud computing is evolving rapidly, we expect power demand to rise quickly, even if AI advances lead to major energy efficiencies.

Liquefaction facilities for shipping US natural gas around the world (as LNG), are running at capacity amid strong demand in the northern hemisphere’s winter. The US Energy Information Administration (EIA) estimates that LNG exports could rise from 94 billion cubic metres (bcm) in 2021, to 227 bcm by the end of 2027. To increase capacity to transport gas from low-cost production regions to the coast for export requires massive investments to remove some of the bottlenecks in US infrastructure. The US exported the equivalent of 11% of its gas production in 2021, the year before Russia’s invasion of Ukraine. Under the EIA’s projection, that share could rise to 18% within three years, with the potential to push up US domestic prices – something we do not think would be popular at home.

Read also: Trump’s climate policy and its impact on investments

That is important, especially for Europe, which has shifted its gas consumption from Russia to the US since 2022. Compared with before the Ukraine invasion, the European Union is paying around USD 10 – 15 per thousand cubic feet (mcf) for LNG on the world market, compared to USD 6 – 8 per mcf from Russia in 2021. Much more LNG will become available for the EU as new US export terminals come into production across 2026-28, and that carries the potential to slash European gas prices, regardless of any geopolitical change in relations with Russia.

Oil share prices have been stable, and valuations attractive

Given rising global energy demand and geopolitical tailwinds, we expect the oil and gas sector to remain supported. On both sides of the Atlantic, ‘exploration and production’ (E&P) companies producing natural gas have outperformed those corporates focused on oil production for almost a year (see chart). This suggests that markets anticipate tighter supplies of US gas, and surpluses in oil markets. In the meantime, oil share prices have been stable, and valuations attractive. In general, the gas complex has benefitted from rising AI-related demand and President Trump’s energy ambitions, as well as the expectation of more gas demand for longer. While momentum favours the gas complex at present, we also remain mindful of oil’s potential to positively surprise investors. We have a neutral view on the energy sector in our equity strategy.