Oil Industry Faces 15% Cost Surge, 120,000 Barrels at Risk from Tariffs

The oil industry is facing a critical juncture as Wood Mackenzie's latest research report warns of significant cost increases and potential production cuts due to tariffs. The report highlights that if the Trump administration fully implements tariffs, the supply chain costs for oil producers could rise substantially. Specifically, the cost of onshore oil and gas extraction in the United States could increase by up to 6%, while offshore extraction costs could surge by as much as 15%.

This cost escalation, combined with persistently low oil prices and the decision by OPEC+ to increase production next month, has raised serious concerns about the profitability of increased production. The report notes that while the industry can sustain operations without drastic cost-cutting measures when oil prices remain around $65 per barrel, a drop below $50 per barrel could jeopardize daily production of 120,000 barrels by 2026. This scenario underscores the industry's vulnerability to price fluctuations and the potential for tariffs to exacerbate financial pressures.

Fraser McKay, the upstream research director at Wood Mackenzie, emphasized that the oil industry has learned valuable lessons from the price collapses of 2015 and 2020, enabling it to respond quickly to market downturns. However, he cautioned that if operators and supply chains anticipate a prolonged period of low prices, the impact could be severe. McKay stated, "This short-term uncertainty could become a killer for investments, especially at a time when the focus should be on long-term demand growth."

The report also predicts that global upstream development spending will decline for the first time since 2020, with 2024 seeing a year-over-year decrease. McKay explained that this year was already expected to be cautious for large oil projects, but the ripple effects of U.S. tariff policies could lead to decision paralysis for some companies, while others face financing or cash flow pressures. Only a few may benefit from cost or schedule arbitrage. McKay concluded that if oil prices fall to $50 per barrel, companies will swiftly reduce investment budgets to ensure shareholder returns.

The potential for a 15% increase in production costs due to tariffs could strain the financial health of oil producers, particularly those operating on thin margins. This cost escalation would force producers to reassess their operations and potentially reduce output, further impacting global oil supply. The implications of these findings are significant for the oil industry and the broader economy. A reduction in daily production by 120,000 barrels could have ripple effects on energy markets, potentially leading to supply shortages and price volatility. This scenario highlights the need for policymakers to consider the potential consequences of tariffs on the oil industry and to implement measures that support the sector's stability and growth. The report serves as a reminder of the delicate balance between economic policies and the energy sector's ability to meet global demand.