By Ginika Igboke
The conflict involving Iran, which continues to affect the flow of roughly one-fifth of the world’s oil supply through the Strait of Hormuz, is viewed by many analysts as an opportunity for the United States to strengthen its position as the world’s leading energy producer.
Industry experts say the disruption has prompted a broader reassessment of global energy supply chains and highlighted the need for greater diversification of oil and gas sources.
“We’re seeing a combination of trying to reopen the Strait while simultaneously recognizing that there are going to be alternative routes to get oil and gas to market, including expanding production in new places and expanding production in the United States,” said Caleb Jasso of the Institute for Energy Research.
Despite rising interest in energy security, U.S. oil producers have remained cautious. Rather than launching major drilling campaigns, companies are focusing on extracting more output from existing wells.
According to Baker Hughes, the number of active oil and gas rigs in the United States has fallen from more than 700 in May 2023 to 558 today. Although the oil rig count has increased modestly this year, many producers remain reluctant to commit significant capital to new drilling projects.
Jason Isaac, CEO of the American Energy Institute, said technological improvements have allowed companies to maintain high production levels with fewer rigs.
“Operators are getting more barrels out of the rigs they already have through longer laterals, improved completion designs, multi-well fracking operations, and AI-driven targeting,” he said.
Why Producers Remain Cautious
Analysts point to several factors discouraging large-scale investment, including uncertainty over future oil prices, memories of past industry downturns, and concerns about potential policy shifts in Washington.
“Oil companies are hesitant to make such big investments over what may be a temporary price spike,” said Paul Mueller of the American Institute for Economic Research.
He noted that producers are also concerned about the possibility of future administrations imposing stricter regulations or higher taxes on the fossil fuel industry.
The industry’s painful experience between 2014 and 2020 also continues to influence decision-making. During that period, many companies spent heavily on expansion only to suffer major losses when prices collapsed.
According to Isaac, investors now prefer companies to focus on dividends, stock buybacks, and debt reduction rather than aggressive production growth.
“Wall Street will not reward production growth right now,” he said. “It will reward dividends, buybacks, and debt paydown.”
Record Production Despite Limited New Investment
Even with their cautious approach, U.S. producers continue to generate record amounts of oil.
Domestic output has increased from roughly 5 million barrels per day in 2010 to nearly 14 million barrels per day today, largely due to advances in hydraulic fracturing technology.
Isaac described the surge in production as a major strategic advantage for the United States, helping shield consumers from even higher fuel prices during disruptions in the Middle East.
Oil prices have retreated from recent highs, with West Texas Intermediate crude falling from above $112 per barrel in April to about $88 per barrel. However, U.S. production has risen only modestly and remains largely unchanged since the start of the Iran conflict.
Jasso said companies are carefully evaluating the timing of future expansion plans because uncertainty surrounding the Strait of Hormuz remains high.
“Because of how much the Strait influences the price of energy, major oil producers are waiting for the right opportunity to expand production,” he said.
Geological and Infrastructure Challenges
Beyond market uncertainty, producers face growing operational challenges.
Isaac noted that much of the highest-quality drilling acreage in the Permian Basin has already been developed. The region currently accounts for approximately 44 percent of U.S. oil production and 19 percent of natural gas production.
He estimates that less than four years of premium drilling inventory remain in the basin at current production rates.
“New wells in lower-tier acreage do not perform like the early wells that drove the shale boom,” Isaac said.
The Wolfcamp formation, the most productive portion of the Permian Basin, contributes more than half of the basin’s total output. Meanwhile, production rates from wells in regions such as the Bakken have reportedly declined compared with earlier years.
Labor shortages also remain a concern. Many experienced workers left the industry during the pandemic, when demand collapsed and companies reduced staffing.
Another major obstacle involves natural gas transportation infrastructure. Oil produced through fracking often generates large volumes of associated natural gas, but pipeline capacity has struggled to keep pace with production growth.
“Permian natural gas takeaway has been constrained for the better part of a year,” Isaac said, noting that several new pipelines are not expected to come online until 2026 or later.
Without sufficient pipeline capacity, producers are often forced to flare excess gas, sell it at steep discounts, or limit oil production altogether.
“This is not just an inconvenience for the gas side of the business—it is directly suppressing oil economics,” Isaac said.
Refining Capacity and Regulatory Issues
Industry experts also point to limitations in America’s refining system.
Much of the nation’s refinery infrastructure was designed to process heavier crude oils imported from countries such as Venezuela. By contrast, most oil produced through modern U.S. fracking operations is light crude.
As a result, approximately 80 percent of oil produced in the Lower 48 states is light crude that is often exported to overseas refineries, particularly in Europe.
Analysts say regulatory reform could help encourage additional domestic production.
“For increasing production domestically, it’s definitely a question of regulatory reform, especially with permitting questions,” Jasso said.
While the Trump administration has supported expanded oil and gas development, many regulatory decisions are made at the state level.
California, once the nation’s largest oil-producing state, has pursued policies aimed at reducing fossil fuel use, including emissions caps, oil-well setback requirements, and environmental accounting rules.
Those policies, combined with higher compliance costs and unique fuel standards, have contributed to refinery closures by companies such as Phillips 66 and Valero.
The closures are expected to remove more than 17 percent of California’s refining capacity, adding further pressure to an already constrained energy market.
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