Oil prices have rocketed 88 percent since the end of 2019, but U.S. production for the week ending 18 March was 10 percent below late 2019 levels.
However, despite soaring prices and insatiable global demand, the U.S. oil industry is unlikely to increase production any time soon, oil company executives say.
The reason: producers are being pressured by their financial backers to “maintain capital discipline” and not invest in new exploration or expanding production from existing operations, according to 59 percent of oil industry executives surveyed this month by the Federal Reserve Bank of Dallas.
We reported this trend in “Frackers Keep Production Low as Oil and Gas Prices Rise” (22 Feb 2022).
For the past decade, oil investors have bankrolled lavish drilling and production in U.S. shale oil. Production soared, prices remained low, and the U.S. became a net energy exporter.
However, shale wells are expensive to bring to market and often play out quickly, shrinking investors’ returns and, in many cases, failing to return a profit.
Then came COVID, with lockdowns leaving oil prices hovering near $30 a barrel for weeks—well below the break-even cost of many shale operations—and, at one point, sending oil futures into negative numbers for the first time in history.
Hundreds of U.S. oil firms went bankrupt, among them flagship shale producers such as Chesapeake Energy and Whiting Petroleum.
“Investors dumped huge funds into shale drilling only to discover that when oil prices dropped, very little value existed at the end of the day,” one industry executive told the Fed survey.
Now, investors want to get their money back, insisting oil companies buy back their own shares, raise stockholders’ dividends, and hoard cash against the next market crash.
No matter that today’s oil prices are about double the $56 per barrel average that producers need to make a profit, according to the survey; major producers can be in the black at just $49, the Fed found.
“Discipline continues to dominate the industry,” one unnamed oilfield services company executive said in the Fed survey.
“Shareholders and lenders continue to demand a return on capital, and until it becomes unavoidably obvious that high energy prices will sustain, there will be no exploration spending,” the person said.
The U.S. must boost domestic oil output by about two million barrels a day in 2023 to meet world demand, one surveyed executive said.
“It is looking unlikely that this will happen,” the person added, “which will result in sustained higher energy prices until the American consumer is pushed into recession.”
TRENDPOST: As in the 1970s, higher oil prices and scarce supplies will drive more consumers toward renewable energy vehicles and technologies.
Unlike the 1970s, however, the cost of installing solar power systems for buildings has fallen to a fraction of what it was 20 years ago. With the hardware, knowledgeable providers, and tax credits abound, last year residential solar installations surged 30 percent year over year, hitting a new record above 500,000.
However, even before the most recent inflation spikes, back in 2021, according to the Solar Energy Industries Association, solar costs jumped up some 18 percent because of supply chain constraints.
On the motor vehicle end, the irony is that high prices at the pump are prodding people to take a more serious look at electric vehicles at a time when EV prices are climbing due to the soaring cost of materials to build them and the prolonged scarcity of computer chips to run them.