Over the last couple of weeks, a stand-off has been developing between President Joe Biden and shale oil and gas producers in West Texas. As soaring gas prices add pressure to cash-strapped United States residents already feeling the pressure of inflation, the economic strain is reflecting poorly on the Biden administration, which is scrambling to get someone, anyone — be it OPEC or producers in the Permian Basin — to open the taps and ease supply shortages. So far, however, Big Oil isn’t budging.
There is a lot of speculation about the many reasons this may be the case. Pundits have pontificated about the political dimensions of the standoff, noting that the right-leaning fossil fuels industry has little incentive to help out an administration that they see as antithetical and threatening to their livelihoods. For his part, President Biden has accused the oil and gas industry of potentially “illegal conduct” as oil execs get rich(er) off of soaring oil prices and has called for a federal investigation into the matter.
But, according to other sources, the real reason that Big Oil won’t raise production is a matter of simple economics. Keeping the supply tight is just too good for the bottom line. And if it’s President Biden who will take the heat for high prices at the pumps, that’s just the cherry on top of a very, very lucrative cake. In fact, according to figures from Deloitte LLP, oil explorers in the United States are making more money now than at any other point in the more-than decade-long history of the nation’s shale revolution. “And this may just be the beginning,” Bloomberg Markets reported this week. “Free cash flow, the key metric watched by investors, probably will increase by 38% next year, presuming oil prices remain elevated.”
This kind of restraint is a new development for the shale industry, and it is clearly paying off. Historically, the Permian Basin has been unable to resist a “drill, baby, drill” mentality when oil prices are high, ultimately flooding the market and deflating prices. This would then be followed up by a period of production cuts and austerity measures until oil prices recovered, and then companies would buck production caps and the process would start all over again in an amazingly predictable boom and bust cycle.
But no longer. “After effectively subsidizing consumers through the 2010s with break-neck drilling that depressed global oil prices, the shale industry appears to have struck a winning formula: moderating production, limiting reinvestment in new wells and shaving debt,” Bloomberg writes. As such, U.S. shale is digging its heels in and refusing to pump despite any amount of begging and pleading from the White House. Despite the fact that global energy demand has bounced back to pre-pandemic levels, U.S. oil production has stubbornly remained 12% lower than they were in February 2020, right before the impact of the pandemic was felt around the world. This represents a huge volume of supply — a 12% contraction is the equivalent of nixing the entire oil output of the Gulf of Mexico.
Ironically, the Permian is now poised to increase production to its highest levels on record and is projected to hit 4.95 million barrels a day this December, but the ramp-up won’t be nearly enough to close the 12% production gap. Drillers are still holding off on increasing output in other basins as they continue to enjoy sky-high profits and look toward a potential global oil glut in the next year if too much production is ramped up too quickly in the immediate term, ultimately bringing them back to that classic boom-and-bust cycle that they’re almost managed to break out of.
By Haley Zaremba for Oilprice.com
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