U.S. drilling slows, not expected to rebound: Dallas Federal Reserve

Low oil prices, tariffs, and market uncertainty continue to sideline rigs in the U.S. oil patch, and industry executives told a survey conducted by the Dallas Federal Reserve that they largely do not expect a near-term turnaround.

The survey of industry leaders finds that drilling activity contracted in the second quarter as costs continue to rise. Oil prices continue to languish in the mid-$60s per barrel, a price level that many drillers find too low to turn a profit.

Nearly half of industry executives that responded to the survey said that they expect to drill fewer wells in 2025 than they anticipated at the start of the year.

Despite the aggressive efforts at deregulation by the Trump administration to promote fossil fuels, the trade war and, in particular, tariffs on steel, are sapping enthusiasm from an industry that is otherwise supportive of the president.

“It’s hard to imagine how much worse policies and D.C. rhetoric could have been for U.S. E&P companies,” one anonymous executive said. “We were promised by the administration a better environment for producers but were delivered a world that has benefitted OPEC to the detriment of our domestic industry.”

About a third of respondents said that steel tariffs will force them to drill fewer wells. The precise cost impacts varied by company, with a quarter of respondents saying that tariffs had “no impact” on their cost structure, while 26 percent said it would add 4-6 percent to drillings costs. Another quarter of companies said steel tariffs could add 8-10 percent or more to their production costs.

61 percent of them said that if oil prices remain at $60 per barrel over the next 12 months, they would decrease drilling.

“The Liberation Day chaos and tariff antics have harmed the domestic energy industry,” one executive said, referring to Trump’s trade war offensive in April. “Drill, baby, drill will not happen with this level of volatility. Companies will continue to lay down rigs and frack spreads.”

U.S. oil production has already stagnated. In April, the latest month for which reliable data is available, the U.S. produced 13.4 million barrels per day. Specific output levels vary from month to month, but that figure has remained largely unchanged over the last three quarters.

“There is constant noise coming from the administration saying $50-per-barrel oil is the target. Everyone should understand that $50 is not a sustainable price for oil. It needs to be mid $60s,” another respondent said.

The mid-$60s per barrel works for some producers, but not all.

“Private and smaller oilfield services firms (OFS) and contract drilling companies are rapidly failing and going out of business. This will eventually undermine our country’s tremendous ability to ramp up when and if the need for increased production arises.”

Water problems

Texas drillers face a series of other worrying problems involving water.

Water is scarce in the Permian basin, but companies are using billions of gallons of water from West Texas rivers in order to frack their wells even though the region is suffering through a megadrought.

But that isn’t all. Drillers also pull enormous volumes of salty brine out of the ground during the extraction process. This “produced water,” which can contain arsenic, heavy metals, and radioactivity, must be handled in some from. Companies often re-inject the water back underground, but that has led to an increase in earthquakes. At the same time, trucking the toxic wastewater to a disposal site is costly.

Costs continue to rise and the issue is starting to become a significant problem for Permian producers.

“West Texas saltwater disposal costs have rapidly increased to injurious levels putting strong pressure on margins,” one executive responded in the Dallas Fed survey.

“The long-term costs for transportation and disposal of produced water are increasing. It’s safe to now add water takeaway to the list of significant logistical challenges that producers are forced to deal with in the Permian Basin,” another added.

Most respondents to the survey said they expect water management to constrain drilling in the Permian over the next five years, and 32 percent said they expect water will be a “significant constraint.”

One executive said water management is a “potential disaster waiting to happen.”

Strain on production

Higher costs and weak prices have put an end to production growth. Some industry titans have begun discussing the possibility that U.S. output has already peaked.

“We are spending way too much time and resources on trying to predict the price of oil. We dropped our rig count 50 percent,” another industry insider said. “Also, suppliers are being squeezed, and there is a concern some of our vendors will not survive.”

The levelling-off of U.S. oil production will have knock-on effects on natural gas production. The Permian basin is one of the few shale basins where gas output is on the rise. But gas in West Texas tends to come as a by-product during oil extraction; gas is not the target itself. As such, when oil drilling activity ebbs, a side effect will be to curtail gas output.

Slower gas production is unfolding at a time when LNG exports continue to ramp up. Those forces likely make the current pricing environment untenable. Top shale driller EOG Resources, for instance, sees U.S. natural gas prices shooting up to $4.50 per MMBtu in the coming years, up from around $3.50 today.

Meanwhile, the near total rollback of clean energy incentives at the federal level could result in more severe energy shortages, potentially resulting in price spikes and grid dysfunction.

To be sure, not all respondents to the Dallas Fed survey were disgruntled about policy coming out of Washington. “Thank God the previous administration is gone and so are their anti-energy policies,” one said.

(Writing by Nick Cunningham; editing by Sophie Davies)