Does Limited US Shale Spending Guarantee Higher Energy Prices?

• Analysts are predicting higher-for-longer oil prices, and it’s becoming a major problem for Biden.
• The consequences of underinvestment on a global level are only beginning to be felt now.
• Despite accusations of spending too much money on oil and gas rather than renewables, oil companies appear to not be spending enough on oil and gas.

The overwhelming majority of analysts expect oil prices to continue climbing, with Brent widely expected to top $100 per barrel by the end of this year. Prices at the pump are also rising, but this time it will take more than an SPR release for the Biden administration to curtail. And help is not coming. Gas prices are a sensitive matter for any administration. Just how sensitive they have become for the Biden administration was made clear last year when the U.S. President first asked and then insisted that OPEC increase its production of crude oil to boost supply at a time when it was falling well short of supply.

OPEC, however, did not respond to the demands, forcing the White House to consider turning to the local oil industry—an industry it had demonstrated from the very beginning that it would not befriend. But there are needs, and Biden did discuss the oil supply situation with U.S. oil companies last year. This did not, however, lead to anything particularly productive. The rig count is rising, for sure, but it is not rising anywhere near fast enough to dampen retail fuel prices.

Under normal circumstances, the oil industry would have responded to higher oil prices by increasing production, especially in shale, where this increase could be implemented a lot more quickly than in conventional oil fields. These are not normal circumstances, however. The oil industry is under pressure from shareholders, regulators, and the very government to not produce more oil because there is an energy transition underway, and we need to put a stop to our oil addiction.

Despite abundant evidence that demand for oil and gas, even coal, is still quite robust, the pressure is paying off in that U.S. oil companies are now prioritizing returns to shareholders rather than growth. And they appear adamant that they will not change these priorities even if Brent hits not $100 but $200.

“Whether it’s $150 oil, $200 oil, or $100 oil, we’re not going to change our growth plans,” Pioneer Natural Resources’ chief executive Scott Sheffield told Bloomberg in an interview last week. “If the president wants us to grow, I just don’t think the industry can grow anyway.”

Also last week, Devon Energy’s Rick Muncrief told the Financial Times, “In the back of everyone’s minds is, ‘When is it going to be [production] growth? . . . We have investors saying ‘My gosh, if not now, when?’ But for everyone saying that there’s at least one other if not two others waiting to say, ‘Gotcha! We knew that discipline would be shortlived.’ We have learned our lesson.”

Speaking to Bloomberg in a separate interview, Muncrief also said, “We’ve had enough head fakes that we’re going to be very thoughtful in ramping activity up. 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.”

It’s not just the desire to keep shareholders happy or take their time to fully recover that is motivating restraint. According to some, sizeable growth is physically impossible for most parts of the shale patch, even at these higher prices because the low-cost, economically viable drilling spots are running out.

At the same time, higher costs resulting from inflation and continued shortages in some segments are adding pain to the industry, further motivating it to keep it cautious and wait with growth plans.

Even so, the EIA is forecasting that oil production will grow both this and next year. In fact, the EIA expects U.S. oil output to reach a record high next year, at 12.6 million bpd. Most of this will likely come from private shale producers but also from supermajors such as Exxon and Chevron. Both said at the release of their 2021 results they had plans for double-digit growth in Permian oil output, with Exxon eyeing an increase of as much as 25 percent and Chevron seeking to raise Permian production by 10 percent this year.

Meanwhile, the global oil supply remains tight and OPEC+ is determined to stick to its original production scenario whatever else happens. Throw in the latest spike in geopolitical tensions involving Russia, and it is no wonder that some analysts are beginning to talk about $150 per barrel. And it’s not because of Russia and Ukraine.

″Given that you’ve got this underinvestment in capital exploration, we’re running low on physical oil, we’re running short of supply,” John Driscoll, director of JTD Energy Services, told CNBC last week. “There is a scenario where we could vault past $120, even as high as $150.”

The consequences of underinvestment on a global level are only beginningto be felt now, according to many, after years of oblivion as everyone focused on the energy transition. Despite accusations of still spending too much money on oil and gas rather than renewables from environmentalists, Big Oil, and smaller companies, too, appear to not be spending enough on oil and gas. And this, sadly, means that no one will come to the rescue for the White House in its attempts to lower gas prices ahead of the November elections.
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¹ Don’t deem this to be impossible. As Nassim Nicholas Taleb pointed out, tails are fat. If Covid mutates from its current <1% fatality level (but with lots of morbidity shoes dropping now and more in the future) to >5% mortality, expect a lot of converts to containment and elimination.