The price of U.S. oil climbed more than 5 percent Monday in the wake of plans by Saudi Arabia and other OPEC countries to cut production, raising new questions for the Biden administration and motorists who rely on gasoline.
But even if domestic prices continue to climb, it may take months for U.S. oil output to increase in a meaningful way — if at all.
Growth in oil and gas production has remained essentially flat in the United States for the past several months, according to a report released last week by the Federal Reserve Bank of Dallas. In that report, oil executives cited inflationary costs in the oil field and fear of a looming recession as reasons why output remained flat (Energywire, March 30).
At the same time, wells that produce both crude and natural gas have taken financial hits since the price of natural gas has begun to crater, said Andy Lipow, an oil analyst with the Houston-based Lipow Oil Associates LLC.
The average price of U.S. natural gas fell from a high of $8.81 per million British thermal units in August to $2.38 in February, according to federal data on benchmark prices, making those endeavors less profitable as the cost of a barrel of U.S. crude fell from an average of $114 in June 2022 to $72.87 on March 27.
“Combined with higher labor costs, higher costs for pipe and sand and services, [oil producers] need higher oil prices simply to drill,” Lipow said.
OPEC and allied countries announced production cuts over the weekend totaling more than 1 million barrels of oil per day. Saudi Arabia said it was a “precautionary” step to help stabilize the oil market, according to the Associated Press.
Price fluctuations over the past few months have not inspired more production, according to data released by the U.S. Energy Information Administration last week.
U.S. crude production grew by 2.9 percent from December 2022 to January, rising to a little less than 12.5 million barrels a day, or about 50,000 more barrels a day than was being produced in October 2022. But more recently, there has been a decline in U.S. crude rigs in operation according to EIA, dropping to 604 in February compared to 616 in January and 623 last December.
Part of oil companies’ reluctance to increase production or invest in new exploration is likely tied to capital discipline that has become a staple of the industry since oil prices began rebounding after plunging when Covid-19 hit, said Hugh Daigle, an associate professor of petroleum engineering with the University of Texas, Austin.
Oil companies’ shareholders have been demanding better returns on their investments, especially after the last major boom-and-bust cycle from 2014 through 2016.
At the time, companies flooded the market when oil prices spiked by rushing to produce as much as possible in shale plays, which usually were running on low margins. That influx of product caused prices to eventually crater, offering lower returns than investors expected, with many eventually losing money.
Since then, Daigle said, investors have told oil companies not to repeat those same mistakes. Even with the potential for oil prices to keep rising following OPEC’s announcement, Daigle and Lipow said they don’t expect companies to start a pumping frenzy.
“In the short term, I think a lot of people are going to take a wait and see approach in light of the capital discipline we’ve seen across the industry,” Daigle said.
That could cause costs to rise at the pump in the coming weeks. On Monday, AAA put the average U.S. price at just over $3.50 for a gallon of regular gasoline. That was up nearly a dozen cents from a month earlier, the automobile club said, but lower than the roughly $4.19 per gallon average a year earlier.
Analysts had already anticipated that oil prices would increase for a variety of reasons, including a seasonal rise associated with the summer driving season and China’s economy reopening after that country lifted Covid restrictions. The OPEC announcement adds to that.
However, Daigle said prices won’t likely rise to the roughly $5 per gallon average levels seen nationally in June 2022.
“One thing so anomalous last year was that you had refinery outages, supply chain issues — a lot of things came together to make it a particularly bad summer, which was exacerbated by [Russia’s] war in Ukraine,” Daigle said. “I think it’s unlikely we’ll see all that again this summer. My best guess is, yes, we’ll see an increase in prices because of supply and demand, but it won’t be nearly as painful as last year because those other issues have been mitigated.”
That would be welcome news for President Joe Biden. On Monday, Bloomberg said the president signaled that OPEC’s announcement may not as bad as some people think.
The Biden administration spent time focused on gasoline prices and efforts to bring them down last year. The administration ultimately sold more than 216 million barrels of crude from the nation’s Strategic Petroleum Reserves to keep prices down.
Biden also threatened OPEC last year over its announcement in October that it would cut production then by 2 million barrels a day, saying there would be “consequences.” However, no public action materialized (Energywire, Oct. 12, 2022).
On Monday, National Security Council spokesperson John Kirby told reporters the Biden administration does not believe “production cuts are advisable at this moment given the market uncertainty.” White House principal deputy press secretary Olivia Dalton said Biden would mostly focus on minimizing the impacts to American consumers.
The Biden administration lambasted major oil and gas companies earlier this year after they reported record profits for 2022. Biden told them they needed to use those profits to invest in more production to keep prices at the pump low rather than enriching shareholders through increasing dividends and buying back stock.
But other than verbal assaults, Lipow said, the White House has limited options for sparking domestic production in the short term.
“There’s very little in practice the administration can do to get oil out of the ground immediately,” Lipow said. “They have to adopt policies that allow companies to do longer-term planning.”