Gas prices are high. Oil CEOs Reveal Why They Don’t Drill More

According to the Federal Reserve Bank of Dallas, 59% of oil executives said investor pressure to maintain capital discipline is the main reason public oil producers are holding back growth. survey released Wednesday.

For years, boom and bust, the oil industry has spent lavishly to finance the overall increase in production. US oil production has risen sharply, keeping prices low. However, maintaining profits proved impossible. Hundreds of oil companies have gone bankrupt during multiple oil price crashes, prompting investors to demand more restraint from energy executives.

Today, oil companies are under tremendous pressure from Wall Street to return cash to shareholders through dividends and buyouts instead of investing in much-needed reserves.

“Discipline still dominates the industry,” said an oilfield services executive. Dallas Fed in a poll. “Shareholders and creditors continue to demand a return of capital, and until it becomes inevitable that high energy prices will continue, there will be no exploration spending.”

US production falls despite prices skyrocketing

While U.S. oil supply is expected to pick up in the coming months, it remains well below pre-pandemic production. This is despite the fact that oil prices have soared to levels not seen since 2008.
The US produced 11.6 million barrels per day in the week ending March 18, according to the US Energy Information Administration. This 10% less than at the end of 2019.

Prices, on the other hand, have risen. Oil in the US closed on Wednesday at $114.93 a barrel, up 88% from the end of 2019.

Current prices are well above the $56 a barrel average that oil companies have told the Dallas Fed to drill at a profit. Larger companies have said they need a barrel price of just $49 to make a profit.

However, oil executives and investors are reluctant to increase supply enough to cause another glut that would drive prices down. And shareholders want companies to return windfall profits in the form of dividends and buyouts, rather than reinvest them in increasing production.

One executive interviewed pointed to the staggering losses suffered by shareholders in recent years. The energy sector, which consists mainly of oil and gas companies, has clearly shown the worst results over the past decade.

“Investors invested heavily in shale drilling only to find that when oil prices fell, there was very little value at the end of the day,” the top executive said.

Only 6% blame government regulation

After the Russian invasion of Ukraine, the price of regular gasoline in the US reached a record high of $4.33 per gallon.

While environmental policy is often blamed for high energy costs, oil executives don’t seem to see it as a major factor.

Only 6% of executives polled by the Dallas Federal Reserve Bank cited government regulations as the main reason why public oil companies are holding back production growth.

Another 11% pointed to environmental, social and governance (ESG). The ESG movement has seen many investors move away from fossil fuel companies in favor of clean energy companies.

About 15% of executives said “other” factors were to blame, including staff shortages and supply chain issues.

The “denigration” of the oil industry

However, several executives interviewed expressed strong concerns about regulations and industry rhetoric from the federal government, as well as individual states such as Colorado.

“The message from the White House, Capitol Hill and Wall Street was that oil and gas is a dying industry and should be abandoned,” said one respondent. The executive pointed to “serious staffing issues” that are partly due to the vilification of the oil and gas industry.

“Regulation is causing significant damage and hindering US energy production,” said another executive.

For consumers worried about near-record gas prices, the good news is that supply is on the rise.

Oil prices rose 5% after Russia warned of extended pipeline shutdown

The business activity index in the Dallas Fed survey jumped in the first quarter to its highest level in its six-year history. This increase was due to a sharp increase in the oil production index.

The bad news is that the major oil companies are signaling a marginal increase in supply.

Among major oil companies, the median production growth rate between the fourth quarter of last year and the first quarter of this year was 6%. Smaller firms, many of which are not publicly traded, expect much faster output growth of 15%.

If US oil companies and OPEC fail to increase production, analysts warn that energy prices are likely to remain painfully high.

An oil industry executive who participated in the Dallas Fed survey said the United States needs to increase production by about two million barrels a day in 2023 to balance global supply and demand.

“It is unlikely that this will happen,” the top manager said, “which will lead to a steady increase in energy prices until the American consumer plunges into recession.”

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