With oil demand on track to outpace supply in 2022, the energy industry could hold the key to potentially lower prices: more production. However, some oil exploration and production (E&P) companies are reluctant to bolster production due to fears that their profits will come to an abrupt end.
The price of oil in recent days came alarmingly close to $140 per barrel, its highest level in over a decade. The price has been on a tear ever since before Russia’s invasion of Ukraine in February.
While the price has since retreated from those lofty levels amid the Biden administration’s call to release 180 million barrels of oil from the U.S. strategic oil reserves, Fitz-Gerald Group CIO Keith Fitz-Gerald estimates oil could climb as high as $150 in the current market cycle.
Prices have been buoyed by record activity in the oil and gas sector, as evidenced by the Dallas Fed Energy Survey’s business activity index, which measures local conditions for businesses in the industry. The index climbed from 42.6 in Q4 2021 to a record reading of 56.0 in Q1 2022. Meanwhile, the oil production index more than doubled in Q1, and natural gas production similarly increased.
Oil profits are in the spotlight, but oil and gas drillers, who are once bitten twice shy after the shale boom of the early 2000s, are reportedly taking things slow. Since 2010, the domestic shale industry has suffered negative free cash flow to the tune of $300 million, resulting in almost 200 bankruptcies, as per Deloitte data.
The U.S. shift to greater energy independence was achieved thanks primarily to the rise of oil and gas fracking, a technology that has bolstered the supply and paved the way for lower prices.
However, fracking companies are hesitant to open the spigots, so to speak, and increase production of oil and gas to ease the supply/demand dynamic. Instead, executives and investors alike prefer a slow-and-steady approach to growth, remembering how the boom cycle suddenly went bust and cost fracking companies billions.
During a recent Community Town Hall at the Federal Reserve Bank of Dallas, senior economic policy adviser Lutz Kilian explained, “Now, finally, the industry is generating profits, and they feel that this is the time for them to be compensated for the risk they took. They’re very much opposed to large-scale production increases because, who knows what the price might do in a couple of years?”
According to Kilian, oil and gas companies are not in a position to deviate from their investors’ wishes, and investors have reason to be skittish. While the Texas workforce has recovered to pre-pandemic status, domestic oil production overall has not.
Per U.S. Energy Information Administration data, both the State of Texas and the U.S. faced an oil production shortfall in January 2022 compared to the pre-pandemic production of February 2020. Texas produced nearly 10% less, and the U.S. produced 11.4% less.
President Biden has since called for a historic release of oil reserves to combat soaring prices at the gas pump. And while U.S. oil production will increase, the Biden administration has accused the oil industry of choosing profits over ramping up supply.
Pioneer Natural Resources, an E&P company based in Irving, Texas, distributes more than three-quarters of its cash flow to investors through dividends and share repurchases. However, Pioneer has vowed to lift production only by up to 5% annually. Even if the oil price surges to $150 per barrel, the company is sticking to its long-term production increase range of 0-5%.
According to Pioneer CEO Scott Sheffield, cited by The Dallas Morning News, the cons of ramping up production, such as potentially waning demand and exhausting the shale field inventory, outweigh any pros.
On the flip side, some oil majors, including Chevron and Exxon Mobil, have agreed to bolster production in the Permian Basin by 60,000 and 100,000 barrels per day, respectively.