Oil Prices Soar, but American Oil Producers Are Not in the Mood to Drill, Why?

As the war in Ukraine continues into its second month, fears about global oil shortages and costs continue. European countries that have been deeply dependent on Russian oil are now looking for quick alternatives and looking to countries like Saudi Arabia, the United Arab Emirates, Iran and Venezuela to provide them. In the case of natural gas, European leaders are also reaching out to what Campbell Faulkner, chief data officer at OTC Global Holdings, calls “the Saudi Arabia of natural gas”—the United States—to do more to help their ailing NATO allies. 

Although the United States ranks 4th in proved natural gas reserves, behind Russia, Iran, Qatar, and Turkmenistan, it is the biggest natural gas producer in the world followed by Russia. 

President Biden has heeded the European leaders’ call for more natural gas from America. He committed to send 15 billion cubic tons of liquefied natural gas to Europe through the end of 2022. He has pledged to increase that total to 50 billion cubic tons per year through 2030.

But that commitment comes amid rising gas and oil prices in the United States and ongoing pressures on the shale oil industry. Despite what Bloomberg calls “vast shale fields holding a seemingly endless supply of natural gas and giant terminals capable of liquefying it and shuttling it abroad,” the U.S. shale oil industry has spent decades caught in a boom-and-bust cycle that threatened to undo the entire industry as recently as 2020. 

In the late 2000s, new technologies introduced in the U.S. oil and gas industry, like horizontal drilling and advanced hydraulic fracturing, or fracking, led to the boom of a “shale revolution.” In big shale states like Colorado, this revolution brought with it a six-fold increase in production between 2010 and 2019, according to Chase Woodruff of Colorado Newsline. That production increase drove down prices and, as Woodruff reports, “in 2018 the U.S. made the world’s top oil producer for the first time since 1973.”

These new drilling technologies were not cheap, though, and the required capital for the technologies and operating expenses came, in many cases, from Wall Street. Investment money flowed freely in the early excitement of the fracking boom. But investors soon soured on oil companies’ use of their capital to fund production with little regard for investment returns. And as early rounds of funding dried up, publicly traded companies simply issued new stock to balance the books, a habit that sent many investors packing.

Then came the chaos of 2020 and, alongside it, a sharp decrease in the demand for oil amid COVID lockdowns. The price of crude oil has once dropped to below $0 dollar a barrel in the United States.

46 American oil and gas companies filed for bankruptcy that year. Many more were involved in mergers and acquisitions that began even before the pandemic and continued well into 2021. The companies that remain, says reporter Irina Slav, “rearranged their priorities from ‘growth at all costs’ to ‘returns above all’.”  We are now in a time, says Slav, “when investors are wondering if it’s even worth it to stay in oil, what with the energy transition and [environmental, social, and governance] commitments.” 

To hold on to current investors and encourage new money coming in, the shale industry has shifted its business model. This shift can be seen clearly in their financial results reports of 2021 and investor outlook documents in 2022. Language like a “new return of capital framework” or “new shareholder return framework” or “updated stockholder distribution strategy” permeate these documents. And despite the now surging oil prices, oil executives and analysts doubt we will see a change in this new industry direction. Says Scott Sheffield, CEO of Texas-based Pioneer Natural Resources, “Whether it’s $150 oil, $200 oil, or $100 oil, we’re not going to change our growth plans.” So, despite the oil and gas industry as a whole having 9,000 unused permits to drill on federal lands, they have no intention of using them to help ease the gas shortage created by the conflict in Ukraine.

They have little reason to, given the sentiments President Biden has made so clear in prioritizing alternative energies. Biden has consistently mentioned his belief that fossil fuel industries will be obsolete within 30 years and committed his administration to the work of energy transition. 

In November 2021, the Biden administration proposed reforms to the country’s oil and gas leasing program that would raise costs for energy companies to drill on public lands and water.

The report completes a review that Biden ordered in January. The president directed a halt to new federal oil and gas lease sales on public lands and waters, but a Louisiana federal judge blocked the administration’s suspension in June.

To make his intention more clear, In his recent Bipartisan Infrastructure Bill, Biden provided a more than $65 million investment in clean energy and the electric grid. That investment will go to upgrading the U.S. power infrastructure, expanding renewable energy, research and development for advanced transmission and electricity distribution technologies, and the promotion of smart grid technologies. Investments are also made in “next generation technologies like advanced nuclear reactors, carbon capture, and clean hydrogen.”

No new investments were made in the fossil fuel industries or the technologies that support them. And now, with global need climbing and no viable energy alternative, Biden is pleading with U.S. oil companies to ramp up production. Shale oil producers aren’t buying in, and for good reason. The industry needs funds to survive, and those funds will not come from Washington. They will come from shareholders and those shareholders “have been very clear that that money is theirs and they don’t want them to spend it on growing supply.” 

A Zooming In audience member summed it up quite bluntly: who wants to drill and be attacked, vilified and the profits taken by socialist? Hmm, another way to look at it.

I’m your host Simone Gao and I’ll see you next time.

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