The Oil Industry's Perfect Storm: How Higher Costs and Lower Prices Are Squeezing Profits and Threatening Stability

Energy expert Peter Tertzakian explains how tariffs and OPEC dynamics create unprecedented margin squeeze for oil producers.

Key Takeaways

• Oil industry faces double pressure with prices around $62/barrel while steel tariffs drive up drilling equipment costs significantly
• US onshore oil production likely peaked at current price levels and capital availability, though massive reserves remain underground
• Shale revolution was fundamentally a capital markets story requiring cheap money that no longer exists in higher interest rate environment
• Republican administrations historically correlate with lower oil prices despite industry political alignment, creating strategic tension
• Advanced drilling technology now resembles "spaghetti" rather than straight pipes, with horizontal wells extending miles and making U-turns underground
• LNG represents the "hydrocarbon of the future" with growing global demand while crude oil consumption approaches potential peak
• OPEC market share wars targeting overproducing members like Kazakhstan contribute to current price weakness amid global demand concerns
• Canadian energy sector seeks diversification away from US-only markets, with new Prime Minister Mark Carney supporting pipeline expansion
• Energy companies largely abandoning ESG commitments and climate initiatives following Trump administration's regulatory rollback signals

Timeline Overview

• 00:00–15:00 — Introduction to oil industry's double whammy; current price levels around $62/barrel; funding environment challenges compared to shale boom era of cheap capital
• 15:00–30:00 — Political dynamics discussion: Republican presidents historically associated with lower oil prices despite industry support; Trump's "drill baby drill" rhetoric versus price reality
• 30:00–45:00 — Input cost inflation from steel tariffs affecting tubular goods and drilling equipment; regulatory changes including co-mingling rules and pipeline politics evolution
• 45:00–60:00 — Technology evolution in drilling from vertical wells to sophisticated horizontal "spaghetti-like" subsurface navigation; manufacturing-style efficiency gains
• 60:00–75:00 — LNG expansion prospects; natural gas as growing commodity versus leveling oil demand; domestic price impacts from export terminal development
• 75:00–90:00 — Talent and workforce dynamics; AI and digital technology reducing office worker needs; competition from other industries for skilled labor
• 90:00–105:00 — OPEC dynamics and market share wars; Trump's Saudi Arabia visit amid cartel tensions; Kazakhstan overproduction discipline measures
• 105:00–120:00 — Trade war impacts on Canada-US energy flows; Canadian diversification efforts; heavy vs light oil refinery considerations
• 120:00–135:00 — ESG and climate commitment abandonment across industry; varied corporate approaches to environmental regulations and reporting burdens
• 135:00–150:00 — Peak US onshore production discussion; price-dependent growth potential; technology capabilities versus economic constraints

The Perfect Storm: Margin Compression from Both Directions

Oil producers face unprecedented margin squeeze as prices hover around $62/barrel while input costs surge due to steel tariffs affecting critical drilling equipment. Peter Tertzakian explains that this level is "marginally profitable for a large part of the industry" but forces higher-cost producers and low-productivity stripper wells offline. The tariff impact on tubular goods, valves, and steel components creates inflation throughout the oil field with effects spreading over months as supply chains adjust. This combination of lower revenues and higher costs represents a uniquely challenging environment requiring careful capital allocation and operational efficiency.

• West Texas Intermediate crude trading around $62.96 creates marginal profitability for most producers while eliminating returns for higher-cost operations
• Steel tariffs drive up costs for essential drilling components including tubular goods, Christmas trees (valve collections), and pipeline infrastructure
• Input cost inflation typically lags policy changes by several months, meaning full tariff impact still emerging throughout 2025
• Boardroom discussions focus on price longevity assessment: "is this going to last a quarter or is it going to last a year" before major budget decisions
• Stripper wells and marginal production facilities becoming economically unviable at current price levels, reducing overall US output capacity
• Higher drilling costs combine with lower commodity prices to compress margins from both directions simultaneously
• Industry executives demonstrate increased caution based on previous boom-bust cycles, adopting wait-and-see approaches to major capital commitments

Capital Markets Reality: The Shale Revolution's Financing Foundation

The shale oil boom represented fundamentally a capital markets phenomenon enabled by cheap equity financing rather than purely technological advancement. Easy money conditions from 2009-2015 funded massive drilling campaigns in the Bakken and Permian Basin formations, but subsequent price wars and "end of oil" narratives around 2017-2018 permanently altered investor sentiment. Current higher interest rates and inflation eliminate the low-cost capital conditions that previously enabled aggressive expansion, forcing industry discipline regardless of technological capabilities or resource abundance.

• Shale revolution began in Bakken around 2009, expanding to Permian Basin by 2011, driven primarily by abundant low-cost equity capital
• 2015-2016 Saudi market share wars marked initial investor sentiment shift as price competition eliminated profits across industry
• "End of oil" narrative circa 2017-2018 coincided with Tesla Model S success and electric vehicle enthusiasm, further dampening investment appetite
• Investor demands shifted from growth to cash flow return: "just give us your cash flow or a significant portion of cash flow. We'll put the money elsewhere"
• Current higher interest rate environment eliminates "low cost of capital era of the 2010s, which was coupled with low inflation, low interest rates"
• Ukraine invasion temporarily revived investor interest as oil prices exceeded $70/barrel and ESG narratives weakened
• Recent price decline has "taken the resurgence off" with investors adopting familiar "I've seen this movie before" skepticism toward energy investments
• Corporate governance evolution means "shareholders are the ones that are deciding whether or not the industry is going to go gung-ho" rather than management teams

Political Paradox: Republican Presidents and Oil Industry Struggles

Historical data reveals counterintuitive pattern where oil industry profits tend to improve under Democratic administrations despite Republican political alignment. Texas oil equipment store owner's quote exemplifies industry recognition: "We make our money during Democratic administrations. I killed it during Clinton, Obama, and Biden." Trump's "drill baby drill" rhetoric creates tension between encouraging production expansion and maintaining low gasoline prices for political benefit, illustrating fundamental conflict in energy policy objectives.

• Statistical correlation shows Democratic administrations associated with higher oil industry profits, though causation remains unclear
• Republican policy emphasis on increased drilling and reduced regulation often leads to oversupply and lower prices
• Trump administration's dual objectives create inherent tension: encouraging domestic production while maintaining low consumer gasoline prices
• Industry political alignment with Republican Party based on regulatory reduction and ESG rollback rather than price support
• Oil prices are "set globally" making domestic political control over pricing limited regardless of administration policies
• "Drill baby drill" narrative more applicable to natural gas expansion than crude oil production given current market dynamics
• Scott Bessent's "3-3-3 plan" included expanding US oil production by 3 million barrels per day, though current trends move opposite direction
• Gasoline price political sensitivity requires maintaining approximately "$3 level per gallon" while supporting domestic industry profitability

Technological Revolution: From Straight Pipes to Underground Spaghetti

Drilling technology evolution transformed oil extraction from century-old vertical well methods to sophisticated horizontal navigation systems that resemble flexible spaghetti underground. Modern drill bits can travel miles horizontally, create fork-like patterns, and execute U-turns to maximize reservoir exposure. This technological advancement enables extracting significantly more resources from existing formations while reducing per-barrel capital costs, though benefits get offset by higher steel input prices and regulatory compliance expenses.

• 2005 industry still dominated by vertical wells using "hit-and-miss" approach resembling "throwing darts at a board"
• Horizontal drilling advancement by 2015 enabled 90-degree turns and miles-long lateral extensions from single surface locations
• Current technology allows "fork-like" subsurface patterns with wells making U-turns and "horseshoeing back" through formations
• Drill bit evolution from "solid steel pipe" to "piece of spaghetti going down and winding around to optimize" reservoir contact
• Exposure area dramatically increased from "20-30 ft of exposure in a vertical cylinder" to "miles of exposure" through horizontal sections
• Technological improvements reduce "capital cost per foot that you drill, the capital cost per barrel that you liberate" through efficiency gains
• Advanced subsurface mapping and instrumentation enable precise drill bit positioning for maximum resource recovery
• Manufacturing-style efficiency focus drives industry consolidation as "scale does matter" in optimizing operational costs

LNG: The Hydrocarbon of the Future

Natural gas represents the fastest-growing hydrocarbon fuel globally while oil consumption approaches plateau, positioning liquefied natural gas (LNG) as the industry's primary growth opportunity. North American natural gas prices remained artificially low due to export infrastructure limitations, creating arbitrage opportunities as global LNG terminals enable access to higher international pricing. Mark Carney's support for Canadian pipeline expansion signals shifting political attitudes toward energy infrastructure development driven by trade war uncertainties.

• Natural gas demand "continues to grow quite handsomely" while oil consumption "starting to level out" with peak demand approaching in coming years
• US LNG expansion already underway with Canada's first major terminal opening "potentially in a couple months and more to follow"
• North American natural gas prices around $3-3.50 per MMBTU compared to global prices of "$8, $9 depending upon the geopolitical state"
• Export terminal development designed to "liberate North American gas into the global market and raise the prices" through arbitrage opportunities
• Trump administration supporting reduced "regulatory drag on building liquefied natural gas terminals" as part of energy expansion strategy
• Canadian Prime Minister Mark Carney's pipeline support represents significant political shift driven by US trade war concerns and sovereignty considerations
• Forward curves already indicating price increases as export capacity expansion connects domestic surplus with global demand
• LNG export growth creates domestic price inflation for US natural gas consumers as bottled-up supply gains international market access

Workforce Evolution: Technology Displacing Traditional Roles

Oil industry employment undergoes fundamental transformation as AI and digital technologies reduce traditional workforce requirements while maintaining productivity levels. Office-based geological and engineering positions face displacement as automated systems enable fewer workers to accomplish equivalent tasks, while field operations remain challenging to automate. Offshore outsourcing of technical roles to India, Philippines, and other markets reflects industry cost reduction pressures amid margin compression.

• Downtown office worker reduction: "whereas it used to take three geologists to do a job function, now you can do it with two or potentially even one"
• US oil rig count declined from 670 to under 500 during recent period, reflecting reduced drilling activity and labor demand
• Blue-collar field worker supply remains "precarious balance" as alternative employment options with better work-life balance emerge
• High-paying nature of oil industry jobs continues attracting workers despite challenging working conditions and family separation requirements
• Chevron's US careers page showing only two domestic office openings while advertising numerous software development positions in India, Philippines, Sri Lanka
• Digital revolution enables offshoring of exploration, mapping, and engineering functions to lower-cost international locations
• Geothermal industry unlikely to create significant competition for oil workers due to relatively small scale compared to traditional energy sector
• Talent shortage concerns from aging workforce and "sunset industry" perceptions partially offset by technological productivity improvements

OPEC Dynamics and Geopolitical Pressures

OPEC's market share enforcement actions against overproducing members create additional downward pressure on oil prices amid already weak global demand from trade war uncertainties. Saudi Arabia's disciplinary production increases targeting Kazakhstan's quota violations demonstrate cartel's willingness to sacrifice short-term revenues for long-term compliance. Trump's Middle East diplomatic efforts face inherent contradiction between supporting domestic oil industry and maintaining low consumer gasoline prices.

• OPEC Plus cartel expanded beyond traditional members to include Russia and other countries, creating more complex coordination challenges
• Kazakhstan's overproduction violations trigger Saudi disciplinary response through increased output designed to "drive the price down"
• Saudi Arabia as "largest producer in OPEC and really the leading country within the cartel" bears enforcement responsibility for quota compliance
• Market discipline actions coincide with weak global demand from trade war uncertainties, amplifying price decline effects
• OPEC production quota violations represent "not a new story" with periodic enforcement actions throughout cartel's history
• Combination of "tenuous demand combined with opening up the valves" creates current price weakness from $70 to $60+ levels
• Trump's gasoline price objectives conflict with domestic industry support as low oil prices undermine "drill baby drill" narrative effectiveness
• Presidential Middle East diplomacy must balance consumer price concerns against energy sector profitability and geopolitical relationship management

Trade War Energy Implications

US-Canada energy relationship faces potential disruption from tariff threats while highlighting North America's integrated energy infrastructure dependencies. Canadian heavy oil exports to specialized US refineries create mutual dependence that complicates trade war implementation, though Canada accelerates diversification efforts to reduce single-customer concentration risk. Energy trade represents significant economic relationship with 4 million barrels daily flowing south from Canada.

• North American energy integration: US produces 12 million barrels daily, imports 4 million from Canada, plus additional volumes reaching 20 million total consumption
• Canadian heavy oil specifically serves Midwest and Gulf Coast refineries "tuned to refining" heavier grades rather than lighter domestic crude
• Initial 10% tariff threats on Canadian oil would create "inflationary" effects passed through refiners to consumer gasoline prices
• Trade war tensions prompt Canadian "MBA 101" diversification strategy: "don't be reliant on one customer. It's concentration risk"
• 70+ year US-Canada energy relationship faces potential disruption for first time, driving Canadian export infrastructure development toward Asia
• Refinery recipe specialization means US facilities depend on heavy Canadian crude while Canadian producers need US processing capacity
• Pipeline politics evolution in Canada reflects sovereignty concerns and trade war vulnerability awareness driving infrastructure development
• Mark Carney's pipeline support represents political shift enabling export diversification away from US-only market dependence

ESG Abandonment and Regulatory Rollback

Energy companies increasingly abandon environmental, social, and governance commitments following Trump administration signals, though industry responses vary significantly across company size and leadership philosophy. Regulatory reporting burden reductions provide cost savings while eliminating sustainability departments, but some executives maintain genuine decarbonization efforts regardless of political environment. The industry's diverse composition prevents uniform response to changing regulatory climate.

• Energy industry diversity prevents simple characterization of ESG response: "There's hundreds of companies" with varying approaches
• Some CEOs "delighted by dropping all these things and thought they were nonsense to begin with" while others "take it seriously"
• Reporting burden reduction eliminates costs: "you needed an entire department to report on these things and that's costly"
• Industry was "overregulated from many dimensions" though "some regulations are necessary" for environmental and safety protection
• Trump administration regulatory rollback provides relief from compliance costs while enabling focus on core operations
• Corporate diversity means "full spectrum of attitudes" toward environmental commitments rather than industry-wide abandonment
• Genuine decarbonization efforts continue among companies with committed leadership regardless of regulatory environment changes
• Cost reduction priorities drive elimination of sustainability reporting departments as companies focus resources on profitability restoration

Peak Production Reality Check

US onshore oil production likely reached maximum output levels given current pricing and capital availability constraints, though massive underground reserves remain accessible at higher price points. Diamondback Energy CEO's assessment reflects industry consensus that activity cuts will reduce production this quarter, marking potential peak at 12 million barrels per daily output. Future growth depends entirely on price recovery and renewed investor interest rather than technological or resource limitations.

• "No shortage of oil in the United States underground. Like there's massive amounts of oil" available for future development
• US oil production peaked "at $65 or so" price levels and "current levels of capital inflow from investors" rather than resource depletion
• Production growth potential remains significant if prices return to "$75 and investors see that there's money to be made in the business"
• Technology improvements continue providing competitive advantages against international producers given sufficient economic incentives
• Current production peak reflects economic constraints rather than geological limitations: "yes, at $65 and under the current conditions"
• Price-dependent production flexibility means output can expand rapidly when economic conditions improve and capital becomes available
• Investor sentiment remains primary constraint on production growth rather than drilling technology or reserve base limitations
• Activity cuts this quarter likely to reduce output marking clear production decline from previous peaks

The oil industry's current challenges reflect multiple converging pressures rather than single-factor problems, creating complex strategic environment requiring careful balance between short-term survival and long-term positioning. Success depends on navigating political uncertainties, technological opportunities, and capital market realities while maintaining operational efficiency during extended margin compression periods.

Practical Implications

• Energy investors should recognize current production constraints reflect economic rather than geological limitations, suggesting significant growth potential if commodity prices recover to $75+ levels
• Oil service companies face prolonged challenges from both reduced drilling activity and steel tariff cost increases, requiring aggressive cost structure adjustments to maintain viability
• Natural gas focused investments offer better growth prospects than crude oil given expanding LNG export infrastructure and sustained demand growth internationally
• Canadian energy companies should accelerate export diversification infrastructure development to reduce dependence on US markets amid ongoing trade tensions
• Energy sector workforce planning must account for continued technology-driven productivity improvements reducing traditional employment requirements while creating new technical skill demands
• Policy makers need realistic frameworks balancing domestic energy production goals with consumer price objectives, recognizing inherent tensions in simultaneous achievement of both priorities