Frustrated by its inability to lift crude prices, Saudi Arabia has ramped up oil production over the past three months. Even before this latest move, many analysts anticipated a decline in oil prices—spurred by President Trump’s Liberation Day tariff announcements and expectations of slower global growth as a result. The kingdom has repeatedly tried to push prices higher, only to be undercut by fellow OPEC+ members who have failed to honor their production quotas. Their overproduction has blunted the impact of Saudi efforts, fueling Riyadh’s growing frustration. Now, there is rising concern that increasing output in an already fragile macroeconomic environment could flood the market with excess supply. Oil prices have already fallen into the $60s from mid-$80s just a few months ago, and there are concerns that if they remain at that level for long, it could severely hurt higher-cost producers. Ironically, this price decline aligns with President Trump’s desire for cheaper oil. But it also complicates matters for Western producers, who had hoped to expand under his administration after facing tighter restrictions during President Biden’s tenure.
What are companies doing? A recent report from the IEA noted that investment in oil production is expected to decline this year—a rare occurrence not seen in a decade, aside from the COVID-era downturn. The primary driver is lower prices, themselves a result of mounting macroeconomic uncertainty fueled by the trade war and surging OPEC+ output. This drop in investment stands in clear contrast to “drill-baby-drill”. The longer prices remain suppressed, the more pain producers will feel. U.S. oil production— near a record 13.5 million barrels per day—is likely to retreat. Shale producers in particular have begun sounding the alarm. None of this should come as a surprise. Yet whether we’re facing a short-term pause or a prolonged downturn will depend heavily on where oil prices head next. Hopes for a near-term recovery have all but faded, especially with Saudi Arabia ramping up production despite the fragile macroeconomic backdrop.
What is US government doing - encouraging more development? Some of the current administration’s moves run counter to the economic reality facing oil producers. President Trump, for instance, is pushing to lift the ban on Arctic drilling and reopen access to Alaska’s petroleum reserve. This effort hinges on executive orders that reverse Biden-era restrictions on new oil and gas leasing in the region. While executive orders offer speed, they lack permanence. For companies considering multi-billion-dollar investments in one of the harshest environments on Earth, regulatory stability—not political swings—is essential. Ignoring the low oil prices of today, without long-term policy certainty, few firms will risk committing capital to such ventures. Environmental priorities, too, appear cyclical. Just three years ago, ESG investing dominated the energy narrative and such projects were being actively shunned. Today, the pendulum is swinging in the opposite direction. But nowhere is the need for long-range consistency more urgent than in the Arctic—where hesitation will persist unless the policy climate becomes more predictable and durable.
How will low oil prices impact inflation? All else equal, falling oil prices tend to have a disinflationary effect on the economy. However, the extent of that impact is uncertain—and it’s unlikely to offer much relief against the inflationary pressures expected from the trade war over the coming months.
Deus ex machina: The sudden and escalating conflict between Israel and Iran over the past two days has made finding a clear signal in the oil market feel like trying to extract meaning from white noise. The unknowns are overwhelming. Oil prices have risen sharply into the $70s. Will the conflict spiral into a full blockade by Iran, cutting off crude flows through the Strait of Hormuz? Iran’s population is nearly ten times that of Israel—does that demographic weight matter here? Will the U.S. throw its support more openly behind Israel? Will Iran walk away from its nuclear hopes altogether? Could this erupt into a proxy war, with China and Russia backing Tehran? Or perhaps a deus ex machina causes the conflict to halt, and the headlines vanish as abruptly as they appeared. For now, we wait. And watch.
