Consumers battered by sky-high gas prices shouldn’t expect relief from the oil industry any time soon.
Many oil and gas executives say they have little interest in increasing oil production — even at near-record crude prices that make production very profitable for their companies.
The price of crude oil has been rising steadily since the beginning of last year. It hit $100 a barrel in March after Russia invaded Ukraine – the first time it hit triple digits in 12 years.
At that price, oil companies would normally be scrambling to grab land and drill new wells. However, a significant number of oil and gas executives say they will not increase production at any cost, according to a survey released this week by the Federal Reserve Bank of Dallas.
When asked what level West Texas Intermediate oil prices would need to reach to get public oil and gas companies back into growth mode, 29% of executives said their expansion plans were not dependent on price. Another 9% cited a price above $120 per gallon.
“40 percent of respondents don’t believe that a price of $120 per barrel, which is very profitable based on what we know about the marginal cost of shale production, is enough to increase production,” said Paul Ashworth, chief economist for North America at Capital Economy.
Oil executives blamed Wall Street for why they stopped drilling. According to the Dallas Fed survey, nearly 60% cited “investor pressure to maintain capital discipline” as the top reason oil companies stopped drilling despite skyrocketing prices.
Only 11% mentioned environmental, social or governance issues; 8% said they had difficulties with financing; 15% gave other reasons.
“Investors in energy stocks have been a little put off by the volatility, so they’re more likely to look to energy companies to pay down their debt or return money to shareholders than to invest in new wells — even if those new wells would be profitable,” Ashworth said.
In other words, many companies prefer to enjoy their high profits rather than increase oil supply. And that’s despite the relatively low price of oil, which they would need to turn a profit. In another question from the Dallas Fed, executives said oil prices of between $23 and $38 a barrel on average would recover the cost of drilling new wells.
“Investors have demanded restraint and capital discipline from their client companies,” one survey respondent told the Dallas Fed.
Another said: “Discipline continues to dominate the industry. Shareholders and lenders continue to demand a return on investment, and until it becomes inevitably obvious that high energy prices will continue, there will be no exploration spending.”
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The price of crude oil is responsible for most of the price of gas. A $10 change in the price of a barrel of oil increases the price of a gallon of gas by 25 cents, the Federal Reserve Bank of St. Louis has estimated.
The big oil companies are also sending in $50 billion dividends to shareholders and is on track to sell $38 billion worth of shares this year.
Big Oil on track for near-record $38 billion share buybacks: The seven supermajors – BP, Shell, ExxonMobil, Chevron, TotalEnergies, Eni and Equinor – head for over-the-top buybacks in addition to an estimated $50 billion dollars in dividends. https://t.co/JILyEQQgvJ pic.twitter.com/jPKPHKdBwQ
— Holger Zschaepitz (@Schuldensuehner) February 20, 2022
The Dallas Fed poll echoes recent comments from fossil fuel CEOs, many of whom have vowed not to increase production to preserve profits.
“Whether it’s $150 oil, $200 oil or $100 oil, we’re not going to change our growth plans,” Scott Sheffield, CEO of Pioneer Natural Resources, told Bloomberg last month.
Pioneer, along with Devon Energy and Continental Resources, is among oil producers that have pledged not to increase production by more than 5% this year. Devon CEO Rick Muncrief told Bloomberg the company will be “very prudent about ramping up activity” after many boom-and-bust cycles.
In Exxon’s recent conference call in February, CEO Darren Woods emphasized the oil and gas giant’s focus on profitability rather than oil volume.
“One of the main goals that we had… it’s less about volume and quantity goals and more about the quality and profitability of the casks that we produce,” Woods told investors.
While Exxon doesn’t expect to increase production, “per-barrel earnings will continue to grow,” Woods said. “As we continue to evolve, you will continue to see … cask quality or cask profitability increase.”
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