MW Big Oil isn't big on 'drill, baby drill' - turning Trump to Canada and Greenland

By Paul Brandus

U.S. oil companies see stock buybacks and dividend hikes as more attractive than boosting production

Here's something that usually surprises people: The United States is the world's top exporter of gasoline.

Here's something that usually surprises people: The United States is the world's top exporter of gasoline. About one-sixth - 16% - of global gasoline exports originates in the U.S. This critical export provides Americans with jobs and eases the U.S. trade deficit. It also keeps other countries dependent on us - the kind of economic leverage President Trump is always talking about.

The U.S. can do this because the country is awash in oil and gas. The U.S. outproduces the world. More than Saudi Arabia. More than Russia. The United States is No. 1.

But staying No. 1 is a top priority for Trump. During the campaign, Trump said that during his second term, America would "drill, baby drill" to increase its record production (achieved during the supposedly oil-unfriendly Biden administration) even further. To that end, the Trump administration has moved quickly to open new federal lands to drilling, and is working to ease regulations. This will help ensure, Trump hopes, America's energy dominance for decades to come.

There's just one problem: U.S. oil companies generally aren't so enthusiastic to dig for more oil. "We're not going to see anybody in 'drill, baby, drill' mode," Exxon Mobil Upstream $(XOM)$ President Liam Mallon said at a recent energy conference in London. "A radical change (in production) is unlikely because the vast majority, if not everybody, is focused on the economics of what they're doing," he added.

Oil companies' underinvestment could lead to America losing its dominant energy role.

By economics, Mallon means fiscal discipline - a cautious approach to capital expenditures, combined with a focus on returning money to shareholders. The price of crude helps drive this strategy: According to a survey by the Dallas Federal Reserve, the break-even price for new drilling projects ranged between $59 and $70 per barrel in 2024.

Although West Texas Intermediate $(WTI)$ (WBS00) crude currently trades near the high end of that range, margins might not be enough for firms to justify big investments. The sector has been burned by overproduction before, which caused prices to plunge. Then there are unforeseen "black swan" events like the coronavirus pandemic, which crushed demand, briefly sending prices to - and this is not a typo - negative-$37.63. So it's not difficult to see why shareholder-friendly policies like stock buybacks and dividend hikes are currently seen as more attractive than investing in capacity.

The problem is that underinvestment could lead to America losing its dominant energy role. Chief Executive Vicki Hollub of Occidental Petroleum $(OXY)$ - a favorite stock of famed investor Warren Buffett - warned, for example, that shale output could soon level off and then decline. "When that happens," she said at a recent conference, "that's when the U.S. is at risk for losing our energy independence."

Here's where Trump comes in. "He understands that if you lose all of your energy independence, geopolitically we would be weaker in that kind of scenario than we are today," Hollub said.

This likely explains Trump's talk - and he seems serious - about making Canada the 51st state, and/or either buying, or even seizing Greenland by force. Both Canada and Greenland are fossil-fuel (and rare earth) giants in their own right.

Though there's a greater chance of me walking on the planet Neptune than Canada becoming a U.S. state, Trump's desires have sparked the interest of thinkers like market strategist Ed Yardeni of Yardeni Research.

In a recent commentary, Yardeni wrote that bringing Canada and Greenland under U.S. control would help "Trump to secure the U.S.'s energy future." Trump "needs the Western Hemisphere to function as a coherent energy bloc," Yardeni noted. "This means both a reliable, unimpeded flow of oil and natural resources from Canada and a safer Mexico. And that means both countries under the U.S.'s thumb."

In terms of energy, Canada is far more important, given that it exports about 3.9 million barrels per day to the U.S. - 10 times what Mexico ships. For this reason, Yardeni called Canada an "indispensable partner."

Trump's ultimate goal could be to achieve greater American control over Canadian energy.

So then what about the tariff war between the two? Trump's 25% tariff on most imports from Canada are now in effect, though energy imports will be levied at 10%.

Read: The U.S. is the world's largest oil producer. So why does it still import crude from Canada?

More: How Trump's tariffs have already hurt the U.S. auto industry

Yardeni said most observers are evaluating this issue through the wrong filter. Tariffs on Canada might seem to be all about protectionism, but Yardeni said it's just one move on the chessboard, and that the ultimate goal is greater American control over Canadian energy.

Yardeni Research Chief Market Strategist Eric Wallerstein told me "the overarching goal of the administration is lower oil prices," which is obviously consumer-friendly, and would please the administration. But again, and coming back to energy companies, lower prices imply lower margins. What incentive would there be for energy companies to burn through billions in risk capital? Wallerstein suggested things like reduced regulatory costs, and a reduction in corporate tax rates (which were already slashed to 21% from 35% in 2017, but are due to expire at the end of 2025) could help boost profits.

But there is another bottleneck: Refinement capacity. While a small refinery opened in Texas three years ago, the last major oil refinery built in the United States was nearly half a century ago. If production were somehow increased, how and where would it be processed? A refinery would cost billions of dollars and take years to build. Who would pay for that? Such costs would certainly be passed along to consumers.

The United States and Canada (and Mexico for that matter) already cooperate closely on energy matters. Bringing the resources of U.S. neighbors under greater American control would be different. But does "different" mean "better?" And what does "control" mean, and who would control it? The U.S. Army? Elon Musk? And what of Greenland? The prime ministers of Denmark and Greenland have both said that Greenland is not for sale. Let's see what Trump - who claims to be a world-class dealmaker - can do about all of this.

More: This stock market pro is following Warren Buffett's lead, saying it's 'not a time to be making big bets'

Plus: China to hit U.S. farm exports including chicken and beef with up to 15% extra tariffs

-Paul Brandus

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March 04, 2025 07:35 ET (12:35 GMT)

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