The Feckless Federal Offshore Drilling Ban

Editors’ Note: This article deals with political matters, so we remind you MarketMinder favors no politician nor any political party, assessing developments solely for potential market and/or economic effects.

While investors’ attention has mostly shifted to the incoming Trump administration, President Joe Biden still has a couple weeks left in the big chair—and is still dotting some last Is and crossing some final Ts. A seemingly big policy move came Monday: a permanent ban on new offshore oil drilling in some federal waters. President-elect Trump is vowing to rescind the executive order once he takes office, but it may not be that simple, given a 1950s law preventing presidents from using executive action to cancel permanent bans. Hence, there is a lot of chatter about threats to long-term US oil production. But it all misses the mark. This ban is more symbol than substance, posing little threat to oil production or Energy stocks.

Those arguing this is a threat point primarily to projections for UK North Sea oil production, which nosedived after Energy Secretary Ed Miliband announced a similar ban across the pond. But the US isn’t the UK. Britain’s oil industry relies on offshore production due to its complicated geology and the fact that mineral rights vest with the crown, negating landowners’ incentives to let drillers experiment with new technology. But here, the vast majority of oil production is onshore, on private or state land, with less than 15% in offshore federal waters.^[i]

Oil producers haven’t been unable to drill offshore. They just haven’t wanted to. Bloomberg columnist Liam Denning had a great discussion of this Wednesday, including a nifty graphic showing oil producers’ chronic refusal to lease available offshore offerings.^[ii]

As he showed, when new leases resumed in 2023 after the Biden administration’s temporary pause, there were 146 million acres up for grabs. Producers leased just 3 million. This isn’t an outlier. In 2017, the first Trump administration cranked the amount on offer from 69 million acres in the Obama administration’s last year to 126 million. Drillers leased just 1 million acres. Upping the offer to 155 million acres in 2018 led new leasing to surge to … 2 million acres. Again and again, year after year, producers declined to bite.

And why should they? Onshore drilling is easy, abundant, far, far cheaper—and primarily on private land, reducing both risk and red tape. As Denning explains: “This is all yet more evidence that, while presidents do shape energy policy in real ways, the oil and gas industry is subject to many other, and often more powerful, forces. The renaissance in the US oil and gas industry, making it once again the biggest producer in the world, has been centered on the shale boom of the past 20 years. Producers found growth, short drilling cycles and, latterly, profits in onshore basins, chiefly in Texas and New Mexico and mostly on private, not federal, land. Little wonder that interest in areas like the deep waters of the Gulf of Mexico, with their huge upfront costs and risks alongside decade-plus development schedules, has waned.”^[iii]

This also exposes, once again, another popular fallacy: that the Biden administration’s anti-fossil fuel rhetoric has torpedoed US oil production. Instead, the opposite happened: US oil output hit record highs.^[iv] The administration’s opinion of the oil and gas industry, whether favorable or scornful, has little bearing on what companies actually do. Prices and global market forces drive producers’ decisions to drill, baby, drill. High prices in the 2000s fomented the shale boom that skyrocketed production—the lure of profits led producers to invest abundantly. When oversupply tanked prices, production dropped in kind as potential profits dried up and the industry consolidated and focused on paying off debt. Supply concerns in 2022 prompted more production growth. Round and round, up and down.

As for Energy stocks, they largely hinge on oil prices. Earnings in the sector depend more on prices than production volumes. If Biden’s ban were actually meaningful, then—counterintuitively—it would probably be bullish for Energy stocks. It would both curb costs and raise revenues as lower production boosted supply. But alas, that is not the reality in which we live, and global market forces will continue determining Energy sector earnings and returns.