No Short Term Fix for Oil Price Inflation (Might as well Move on to Clean Energy)

March 2, 2022

Above, Oil exec Scott Sheffield underlines that oil drillers are loath to ramp up production, even with 100/bbl oil, because they feel their greatest obligation is to their shareholders, and are gun-shy from recent history of boom and bust cycles.

I’m reposting the Bloomberg piece below to underline a point that Biden Press Secretary Jen Psaki has made forcefully in recent days.
Drillers have a shit-ton of federal land they’re not using, and a big reason for that is, they are working to make good on a decade of promises to investors, who have been assured of untold riches just around the corner, and continued to come up empty.
Moreover, memories are still fresh of the carnage after oil prices crashed to the floor in 2014 as a glut overtook global markets.
Prices have now breached $100/barrel, but still no rise out of Texas drillers
Bloomberg hints at what is going on.

Bloomberg:

The Texas wildcatters that ushered in America’s shale revolution are resisting the temptation to pump more oil as the market rallies, signaling higher gasoline prices for consumers already battered by the worst inflation in a generation. 

Crude prices hurtling toward $100 a barrel typically would spark a frenzy of new drilling by independent explorers in shale fields from the desert Southwest to the Upper Great Plains — but not this year. Influential players like Pioneer Natural Resources Co., Devon Energy Corp. and Harold Hamm’s Continental Resources Inc. just pledged to limit 2022 production increases to no more than 5%, a fraction of the 20% or higher annual growth rates meted out in the pre-pandemic era. 

The timing couldn’t be worse for consumers. Outside of OPEC, which has rejected U.S. President Joe Biden’s pleas to accelerate production increases, domestic shale fields are the only other source of crude that can quickly respond to supply shortfalls. Shale executives have been shunning the Biden administration’s entreaties to pump more barrels since late last year. Together with fast-rising global consumption, American drillers’ conservatism is likely to keep oil prices elevated for some time to come.  

“Whether it’s $150 oil, $200 oil, or $100 oil, we’re not going to change our growth plans,’’ Pioneer Chief Executive Officer Scott Sheffield said during a Bloomberg Television interview. “If the president wants us to grow, I just don’t think the industry can grow anyway.’’

To be sure, U.S. oil output will rise substantially this year and is forecast to return to pre-pandemic levels by 2023. But it probably won’t be enough to knock oil prices off their upward trajectory any time soon.

Publicly-listed independent explorers like Pioneer and Devon account for more than half of the roughly 10.5 million barrels that America produces daily from fields in the contiguous 48 states, according to IHS Markit Ltd. The rest comes from closely held outfits, family-run enterprises and the international supermajors, all of which are aggressively boosting output. 

Exxon Mobil Corp. and Chevron Corp., for example, are targeting 25% and 10% shale growth, respectively, this year. At the same time, closely-held entities bankrolled by private-equity firms and family funds now control the majority of the country’s active drilling rigs. 

Going into this week’s quarterly earnings season, investors were apprehensive that the independents would evince signs of weakening discipline. After all, the benchmark North American oil price has surged 22% this year, at one point approaching $96 a barrel. That’s more than double the price needed to earn a healthy profit in places like the Permian Basin of West Texas and New Mexico. Retail gasoline at U.S. filling stations, meanwhile, is already higher than it’s been since 2014, an ominous sign in a market that closely tracks fluctuations in crude markets.  

But the message from shale country is loud and clear:  the independents won’t repeat the mistakes of the past by flooding the world with cheap oil. Record cash flows will go right back to investors through dividends and buybacks, CEOs are saying.  That means U.S. drillers are leaving a lot of crude in the ground. If they chose the other path — pouring windfall profits into new drilling — they easily could inflate domestic production by 2 million barrels a day, according to IHS Markit. Current forecasts are for the U.S. to add less than half that to global supplies this year. 

“We’ve had enough head fakes that we’re going to be very thoughtful in ramping activity up,” Rick Muncrief, CEO of Devon Energy Corp., said during a phone interview. “Let’s face it: we all are recovering in one way or another from this pandemic. We’re just slowly getting healthier and healthier over time, but you don’t get there overnight.”

Such comments are a world away from the free-wheeling “drill, baby, drill’’ heyday earlier this century when shale upended global oil markets with year after year of record-high production. Seasoned CEOs like Muncrief, Sheffield and Hamm have seen too many bust cycles to get carried away again. 

Meanwhile, lots of talk about oil majors leaving their operations in Russia, supposedly in solidarity with the Ukrainian people. Well, Exxon didn’t just grow a conscience – they are cutting losses on some operations that they realize will be losers in a world leaving oil behind.

More on that soon.

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