HOUSTON – Even if oil and gasoline prices rise, industry executives will resist their usual impulse to pump more oil, which could cause energy prices to rise further as the economy recovers.
The oil industry is predictably cyclical: when oil prices rise, producers race for wells – until the world is in oil and prices fall. Then energy companies that have overwhelmed themselves fall into bankruptcy.
This wash-rinse-repeat cycle has been repeated over the last century, three times in the last 14 years alone. But for now, at least, oil and gas companies aren’t following those old instructions.
An accelerated rollout of vaccines in the US is expected to kickstart the American economy this spring and summer, encouraging people to travel, shop, and commute. In addition, President Biden’s coronavirus relief package will put more money in the pockets of consumers, especially those who are still unemployed.
Even before Congress approved the legislation, oil and gasoline prices rebounded after the collapse in fuel demand and prices last year. According to the AAA Motor Club, gasoline prices have risen an average of 35 cents per gallon last month and could reach $ 4 per gallon in some states by the summer. While headline inflation remains subdued, some economists fear that prices, especially for fuel, may rise faster this year than they have seen in some time. That would do more harm to working class families as they tend to drive older, less efficient vehicles and spend a higher proportion of their income on fuel.
In the past few weeks, oil prices have soared to over $ 65 a barrel, a level that would have been impossible a year ago when some traders were forced to pay buyers to take oil out of their hands. Oil prices fell more than $ 50 a barrel to less than zero in a single day last April.
That bizarre day seems to be burned into the memories of oil managers. The industry has been forced to idle hundreds of oil rigs and throttle many wells, some for good. Around 120,000 American oil and gas workers lost their jobs last year, and companies are expected to lay off 10,000 workers this year, according to Rystad Energy, a consulting firm.
But even if they make more money thanks to the higher prices, industry executives pledged at a recent energy conference not to increase production significantly. They also promised to pay off debts and hand over more of their profits to shareholders in the form of dividends.
“I think the worst thing that can happen right now is for US producers to grow fast again,” said Ryan Lance, chairman and general manager of ConocoPhillips, at the IHS CERAweek conference, an annual meeting that was virtual this year .
Scott Sheffield, managing director of Pioneer Natural Resources, a major Texan producer, predicted American production would remain unchanged at 11 million barrels a day this year, compared to 12.8 million barrels just before the pandemic broke out.
Even the organization of the petroleum exporting countries and allied producers like Russia surprised many analysts this month by keeping several million barrels of oil out of the market. The 13 members and nine partners of OPEC pump around 780,000 barrels less oil a day than at the beginning of the year, although prices have risen by 30 percent in recent months.
“The discipline to support higher prices is necessary for the recovery of their economies,” said René Ortiz, former OPEC secretary general who is now Ecuador’s energy minister, adding that many members of the group needed higher oil prices to balance their budgets Debt. “Your reserves have been used up.”
The decision to cut production was largely the work of Saudi Arabia and its closest allies in the Persian Gulf and was a reversal of their position from a few years ago. In late 2014, when oil prices began to decline as American oil production increased, Saudi Arabia and OPEC spurred production and prices fell. The cartel appeared to want to undercut drilling in US shale fields, particularly in Texas and North Dakota.
Updated
March 11, 2021, 8:57 a.m. ET
However, the US oil industry was far more resilient than Saudi authorities expected, and American production continued to grow as companies cut their costs. While many shale companies were hurt by the OPEC move and oil prices never fully recovered, the economies of Saudi Arabia and other oil-dependent nations have suffered far more damage than the United States.
However, the temptation to produce more when prices rise has not entirely gone, especially for countries like Colombia and Guyana looking to pump as much oil as possible before growing climate change concerns push the demand for electricity and fossil fuels Hydrogen-powered vehicles reduce electricity. Russia has pushed Saudi Arabia to relax production caps, while Kazakhstan, Iraq and several other countries export more. Even Iran and Venezuela, which have struggled to sell oil due to US sanctions, are starting to export more.
Some analysts believe that when OPEC and its allies meet again next month, they will allow more production, which could bring prices down.
Currently, global oil reserves are dwindling as energy demand gradually recovers.
As always, tensions in the Middle East could determine what happens to oil prices.
In the past few weeks, drone strikes on power plants in Saudi Arabia have rocked the oil markets. While Houthi rebels in Yemen claimed the operation, the drones could have been fired by Iran, which is allied with the rebels, according to Saudi security officials.
“The warming of the so-called proxy war between Iran and Saudi Arabia in Yemen is only adding to the bullish oil price fever,” said Louise Dickson, an oil market analyst with Rystad Energy.
Iraqi militias believed to be allied with Iran have also attacked American forces.
Some tensions in the region could ease if the Biden administration and Iranian officials resume negotiations on a new nuclear deal to replace that negotiated by the Obama administration and abandoned by the Trump administration. Iran would then most likely export more oil.
Of course, US oil managers have little control over these geopolitical issues and say they are doing what they can to avoid another abrupt reversal.
“We’re not betting on higher prices to save ourselves,” said Michael Wirth, CEO of Chevron, to investors on Tuesday.
Chevron said this week that it would spend $ 14 billion to $ 16 billion per year on capital projects and exploration through 2025. That’s billions of dollars less than in pre-pandemic years as the company focuses on producing the lowest cost kegs.
“So far, these people have refused to pull the bait,” said Raoul LeBlanc, vice president of IHS Markit, a research and consulting firm. But he added that American executives’ investment decisions could change if oil prices rose much higher. “It is far too early to say that this discipline will last.”
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