Trump’s Push to Lower Oil Prices: A Politician Trying to Set the Price of a Market (cuz that always goes well)

Former President Donald Trump has reiterated his commitment to driving down the price of oil, arguing that lower energy costs will help bring down inflation across the broader economy.

While this strategy has been a focal point in recent discussions, details on how such a policy would be implemented remain unclear. The challenge of lowering oil prices is multifaceted, involving domestic production constraints, geopolitical considerations, and global market dynamics.

Given that crude oil prices are currently hovering around 71 per barrel, with Goldman Sachs identifying 70 as a key threshold below which U.S. drilling activity slows, any sustained push to further lower oil prices faces significant headwinds. Additionally, even if oil prices do decline, expecting broad disinflation to follow is not a straightforward assumption.

The Economics of U.S. Oil Production

One potential avenue for lowering oil prices is increasing domestic production. Trump’s advisor, Scott Bessent, has floated the idea of adding three million barrels per day to current U.S. output, which stands at approximately 13 million barrels per day. However, achieving this increase would require substantial investment in drilling and infrastructure, and it is unlikely to happen at oil prices below 70 per barrel.

The economics of U.S. shale production play a crucial role here. Many producers have break-even costs in the 50 to 60 range, but expansion typically requires oil prices well above 70 to justify new capital expenditures.

Additionally, the U.S. oil industry has been more disciplined in recent years, focusing on shareholder returns rather than aggressive production growth. Unlike in previous cycles, energy companies are prioritizing dividend payments and share buybacks over rapid expansion.

If the government were to take a more active role in incentivizing production growth, this could take the form of tax incentives, deregulation, or strategic petroleum reserve SPR replenishment at higher price levels. However, even if production were to rise, the additional supply would need to offset global demand growth and OPEC production cuts to have a meaningful impact on oil prices.

Global Factors at Play

Beyond domestic production, another potential lever to reduce oil prices would involve geopolitical maneuvering. Trump’s comments suggest that his administration, if elected, could explore diplomatic strategies to increase global supply. However, this would not be a simple task.

One possibility is ending the war in Ukraine, which could lead to fewer restrictions on Russian oil exports. While Russian crude continues to flow into global markets despite Western sanctions, a formal resolution to the conflict could ease uncertainty and increase available supply. That said, the broader geopolitical landscape makes such an outcome difficult to achieve in the near term.

Another approach could be pressuring OPEC plus to increase production. Historically, the U.S. has had limited success in influencing OPEC decisions, as the cartel prioritizes maintaining stable and profitable oil prices. OPEC members, led by Saudi Arabia, have implemented voluntary production cuts to support prices, and convincing them to reverse course would require significant diplomatic leverage.

China’s role in global oil demand also cannot be ignored. If Chinese economic growth remains sluggish, oil demand could weaken naturally, putting downward pressure on prices. However, this is not a policy-driven mechanism and remains uncertain.

Challenges in Expecting Broad Disinflation from Lower Oil Prices

While a decline in oil prices would provide some relief to inflation, expecting it to drive broad-based disinflation may be an oversimplification. Energy costs are a key input in many industries, and lower fuel prices could lead to reduced transportation and production costs. However, other inflationary pressures such as wage growth, housing costs, and supply chain constraints are independent of oil price movements.

The Federal Reserve’s inflation outlook has increasingly focused on core inflation, which excludes volatile food and energy prices. Even if oil prices drop, the Fed is more concerned with services inflation, which is driven by labor costs rather than commodity prices. Additionally, the transmission mechanism between lower oil prices and consumer prices is not immediate, as businesses may delay passing savings on to consumers.

That being said, lower oil prices could influence market expectations of future inflation. If consumers and businesses anticipate that energy costs will remain subdued, this could feed into broader economic sentiment and temper inflation expectations. The key challenge is ensuring that any reduction in oil prices is sustained rather than a temporary market fluctuation.

Market Reaction and Investor Implications

Oil prices briefly dipped following Trump’s comments, reflecting uncertainty about how his policies might affect supply and demand. However, the market has struggled to maintain a downward trajectory since oil rallied to 80 per barrel in mid-January. This suggests that traders are skeptical about the feasibility of significantly lowering prices without major supply-side interventions.

For investors, the key variables to watch include

U.S. drilling activity and capital expenditures If producers signal a willingness to expand production despite sub-70 oil, this could influence future supply expectations

OPEC plus policy decisions Any shifts in production targets or geopolitical tensions within the cartel could impact oil price stability

Global economic demand If economic data from major oil-consuming nations signals slowing demand, this could naturally put downward pressure on prices

Energy sector performance Lower oil prices could weigh on energy stocks, particularly companies with high exposure to shale drilling. However, refiners and downstream industries could benefit from lower input costs

Conclusion A Complex Path to Lower Oil Prices

Trump’s pledge to drive down oil prices reflects a broader strategy to combat inflation through energy policy. However, achieving a sustained reduction in prices is far from straightforward. The economics of domestic production, geopolitical constraints, and OPEC plus policy all present obstacles to significantly increasing supply.

Even if oil prices were to decline, expecting broad disinflation to follow is an oversimplification. Other inflationary drivers, particularly in the labor market and housing sector, are not directly tied to energy costs.

For markets, oil prices will remain a critical variable influencing inflation expectations, central bank policy, and corporate earnings. While Trump’s comments signal a potential shift in energy policy, the feasibility of executing such a strategy remains highly uncertain. Investors and policymakers alike will need to closely monitor developments in supply, demand, and geopolitical dynamics to assess whether lower oil prices can realistically be achieved in the near term.