Every new oil rig brings demand for 1.1M truckload miles
Clean, affordable energy is crucial for manufacturing
Yesterday, Secretary of the Interior Ryan Zinke announced in a phone press briefing the Trump administration’s draft plan to open up nearly all of the United States’ outer continental shelf to offshore oil and gas exploration and development. With this move, President Trump continues to fulfill his campaign promises to roll back Obama-era environmental regulations that he argued killed American jobs and crippled domestic energy production.
Last April, Trump signed an executive order called “Implementing an America-First Offshore Energy Strategy” that aimed to expand offshore drilling in the Arctic and Atlantic Oceans and assess whether drilling can take place in marine sanctuaries in the Pacific and Atlantic. Now the White House has unveiled a detailed proposed schedule for where and when those lease sales will actually take place.
In his last two years in office, President Obama sought to solidify his environmental legacy by protecting hundreds of millions of acres of ocean from energy exploration. Sec. Zinke said, “The previous administration took offline 94% of the outer continental shelf and made it off limits for energy exploration and development.” Zinke said this and similar Obama administration actions had drastically reduced Interior Department revenues, which fell from $16B in 2008 to $2.6B by 2016. Money raised by oil and gas leases is sorely needed to fund an $11B backlog in parks maintenance, Zinke argued, saying the U.S. park system is “being loved to death.”
The draft plan would open up the Atlantic Ocean off the coast of Maine, the eastern part of the Gulf of Mexico off the Floridian coast, and the Pacific Ocean off California to offshore drilling. Gov. Rick Scott (R-Florida) has already voiced his objections to the prospect of offshore drilling near Florida’s beaches, citing environmental and tourism concerns, and Sec. Zinke promised that state and local stakeholders would have an opportunity to play a substantial role in determining how and when offshore energy assets are explored.
FreightWaves reported in November on the sky-high forecasts for American oil production in 2018 and the close relationship between energy production, truckload demand, and overall economic activity. Zinke made the point that clean, affordable energy is American manufacturing’s main advantage over competing nations: “American energy has three benefits,” Zinke said yesterday. “One, it’s better for the environment to produce energy here under reasonable regulations. Nobody is better at producing clean, quality, responsible energy than the United States. Secondly, as far as the economy goes, clean, reliable, abundant, and affordable energy is what’s driving our economy in many cases, particularly in the manufacturing area. The price of commodities as far as materials is global. Labor—we’re not gonna pay the same costs as what China can pay and we’re not gonna do that… Our advantage is energy.” Zinke’s argument about the importance of cheap electricity to the competitiveness of American manufacturing tracks perfectly with what McKinsey found in their report “Making it in America: Revitalizing American Manufacturing”, which FreightWaves covered in December.
The effects from these new leases will be mid- to long-term, as it will take years for all of the planning areas to be studied, sold, and developed. The draft plan is not final, of course, but it accurately represents the Trump administration’s commitment to deregulation and, not just energy ‘independence’, but ‘American energy dominance.’
The first planning areas that will be open for new leases are in remote areas of the Arctic Ocean, north of the Alaskan Peninsula. The Beaufort and Chukchi Seas, which saw lease sales in 2008, are the first areas that will be re-opened for business in 2019. According to a 2017 study by the Bureau of Ocean Energy Management, the Beaufort Sea planning area is estimated to hold 1.2B barrels of recoverable oil and .892T cubic ft of technically recoverable natural gas; the Chukchi Sea is believed to hold oil and gas reserves as high as 30B barrels.
Drilling in the Arctic Ocean is very expensive—the exceptionally harsh climate, with air temperatures plunging to -40 degrees Fahrenheit and the difficulty of maintaining pipeline infrastructure that uses (now melting) permafrost as its foundation pushes the break-even point on Arctic oil to more than $78 a barrel. Today’s Brent crude price is $68.02. Shell Oil has already let all of its Arctic leases but one lapse because developing those reserves is simply not profitable. So, don’t expect a sudden oil exploration bonanza in the Arctic planning areas. “It is going to be a really long story,” said William Turner, an analyst at Wood Mackenzie in Houston. “It is not going to be gangbusters.” It’s still an open question as to how valuable Arctic leases will be to the federal government and how much revenue the Interior Department will be able to raise from areas that are not currently commercially viable.
Other potential constraints to the expansion of American energy production exist. Yesterday FreightWaves reported on the possibility that a shortage of truck drivers in Texas might slow the Permian basin oil boom. The region reportedly needs 3,000 additional drivers to maintain its current growth rate. Truckers who were abruptly laid off after the last oil bust in January 2016 have been reluctant to return to the volatile, cyclical industry. According to the Baker Hughes Rig Count, the U.S. has 929 oil rigs currently running, up 271 year-over-year. The Trump administration’s ambitions for American energy dominance might turn out to be one more reason to drastically increase driver pay.
FreightWaves closely watches the energy markets because of how important it is to the freight sector. Between being one of the largest costs for a fleet, to one of the largest demand drivers in the economy, energy prices and demand have a dramatic impact on the outcome of the US trucking and freight industry. To discover more insights on the impact of oil on freight, check out this article we did last year.
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