Oil prices are soaring to seven-year highs, but don’t expect US oil producers to ramp up supply.
On the face of it, it’s an ideal time for US firms to cash in on high prices after Russia’s invasion of Ukraine: Traders are nervous about purchasing Russian oil due to uncertainty about the situation, though those exports aren’t subject to current sanctions. And other major producers like Saudi Arabia have indicated they won’t fill the global supply gap.
Making more US oil could net a tidy profit for producers while lowering prices at the pump for drivers. But several issues are stopping these companies from scaling up production.
Like many industries during the pandemic, oil producers are struggling with a shortage of workers. They’re also having trouble sourcing some of the equipment they would need to ramp up production, including pipes and specialized sand used in fracking to extract shale oil.
“They can’t find people, and can’t find equipment,” said Robert McNally, president of consulting firm Rapidan Energy Group. “It’s not like they’re available at a premium price. They’re just not available.”
As a result, US oil production is just under 12 million barrels a day, 8% lower than in 2019. Experts say the industry is unlikely to get back to that pre-pandemic level this year — and that the last decade’s rapid increases in US oil production, typically double-digit percentages year-over-year, are probably a thing of the past.
Another factor likely making oil companies cautious about investing too much, too fast is 2020’s oil bust. The early days of the pandemic drove oil briefly to negative pricing, resulting in a spate of bankruptcies across the industry.
“They’re more confident we don’t have to worry about a bust, [but] they’re not uncorking the champagne,” McNally said. “2020 is still fresh in their minds….They’re still scarred.”
The other thing keeping US production in check: investors seem to be reluctant to invest in fossil fuel stocks. Major US oil stocks have lagged behind the broader market for most of the last two years, teaching executives a hard lesson: Use the recent windfalls to reward investors, not sink more wells.
“Oil and gas companies do not want to drill more,” said Pavel Molchanov, an analyst at Raymond James. “They are under pressure from the financial community to pay more dividends, to do more share buybacks instead of the proverbial ‘drill baby drill,’ which is the way they would have done things 10 years ago. Corporate strategy has fundamentally changed.”
To that end, while companies like ExxonMobil, Chevron (CVX), Marathon (MRO) and Phillips 66 (PSX) expect to spend more on exploration and other capital spending in 2022, none of those companies expect to hit 2019 spending levels. And it will take time for them to turn that additional exploration spending into oil, Molchanov said.
“If someone starts drilling oil wells today, the increased supply might be 6 months, 12 months, even years away,” he said.
When asked about production targets for 2022 during a January earnings call, ExxonMobil CEO Darren Woods responded, “The primary objectives we’ve had in looking at the portfolio is less about volume and volume targets and more about the quality and profitability of the barrels that we’re producing.”
That has become the mantra throughout the oil industry, Molchanov said.
“Because of the industry’s strong emphasis on capital discipline, reaching peak production should be realistic in 2023, but not before then,” he said. “And it’s never going to grow at a rapid rate ever again. The days of US oil supply growing double digits on sustainable basis, those years are gone.”
Looking ahead, the industry is more eager to increase production than it was in the fall, said McNally, in part because they are less concerned about US government efforts to limit fossil fuel production in an effort to fight climate change.
“The Biden administration is suddenly interested in more drilling, not less,” McNally said. “People are more worried about high oil prices than anything else.”