Consumers who have been pounded by sky-high gasoline prices shouldn’t anticipate respite from the oil sector any time soon, according to industry experts.
Many oil and gas executives have stated that they have no interest in raising oil output — even at current crude prices that are at record highs, making extraction extremely profitable for their firms.
Since the beginning of last year, the price of crude oil has been continuously increasing. It surpassed $100 a barrel in March, following Russia’s invasion of Ukraine, marking the first time in 12 years that it had exceeded three digits.
At that price, oil corporations would ordinarily rush to acquire property and begin drilling new wells to take advantage of the situation. According to a study conducted this week by the Federal Reserve Bank of Dallas, a significant percentage of oil and gas executives have stated that they will not boost output at any cost.
On the question of what level the price of West Texas Intermediate oil would have to reach in order for publicly listed oil and gas businesses to return to growth mode, 29 percent of executives said that their expansion plans were not reliant on the price of WTI oil. Another 9 percent stated that they would pay more over $120 per gallon.
As Paul Ashworth, chief North American economist at Capital Economics, explained, “Forty percent of respondents do not believe that an oil price of $120 a barrel, which is quite profitable based on what we know about the marginal cost of shale production, is sufficient to expand output.”
Oil executives pointed the finger at Wall Street as the reason for their decision not to drill more. Oil firms have cited “investor pressure to preserve capital discipline” as the key reason they haven’t increased their drilling despite increasing oil prices, according to a study conducted by the Dallas Federal Reserve.
Only 8% cited environmental, social, or governance concerns; 6% stated that they were having problems obtaining finance; and 15% stated that they had other factors in mind.
Ashworth explained that investors in energy equities have been thrown off by the volatility, and as a result, they are searching for energy companies that would pay down their debt or return money to shareholders rather of going out and investing in new wells — even if those new wells are profitable.”
This means that many corporations are opting to take advantage of their large profits rather than increasing the supply of crude. This is despite the comparatively low oil price at which they would have to operate in order to make a profit. When asked a second question by the Dallas Fed, CEOs said that oil prices between $23 and $38 a barrel would cover the cost of drilling new wells on average.
“Investors have requested that their client firms exercise prudence and capital discipline,” one respondent to the Dallas Fed’s poll told the bank.
Another person expressed themselves as follows: “Discipline continues to reign supreme in the business world. In order to satisfy shareholders and lenders, exploration investment will continue to be curtailed until it becomes unavoidably evident that high energy prices will continue to be sustained.”
The price of crude oil accounts for the vast bulk of the variation in the price of gasoline. According to the Federal Reserve Bank of St. Louis, a $10 change in the price of a barrel of oil results in a 25-cent increase in the price of a gallon of gasoline, on average.
Aside from that, the main oil firms are paying out $50 billion in dividends to shareholders and are on target to buy back $38 billion in shares this year, a move that will raise investors’ bank accounts even more by raising the value of their stock investments.
Big Oil on course for near-record $38bn in share buybacks: The seven supermajors – BP, Shell, ExxonMobil, Chevron, TotalEnergies, Eni and Equinor – set for supercharged stock purchasing on top of estimated $50bn of dividends. https://t.co/JILyEQQgvJ pic.twitter.com/jPKPhKdBwQ
— Holger Zschaepitz (@Schuldensuehner) February 20, 2022
A recent study by the Dallas Fed reflects sentiments made by fossil-fuel CEOs, many of whom have sworn not to raise output in order to protect their companies’ profitability.
Last month, Pioneer Natural Resources CEO Scott Sheffield told Bloomberg that “whether oil is $150, $200, or $100 a barrel, we are not going to adjust our expansion plans.”
Pioneer, along with Devon Energy and Continental Resources, is one of the oil extractors that has agreed not to increase its output by more than 5% this year, according to the Energy Information Administration. After years of boom and bust cycles, Devon CEO Rick Muncrief told Bloomberg that the business will be “extremely careful” in ramping up operations once again.
Exxon’s CEO, Darren Woods, stressed the importance of profitability above amount of oil on the company’s most recent results call with investors.
To put it another way, “one of the key objectives we’ve had… is less about volume targets and more about the quality and profitability of the barrels that we’re producing,” Woods said in a presentation to investors.
Even if Exxon does not intend to increase the amount of oil it extracts, “the profitability per barrel will continue to rise,” according to Woods. The quality of the barrels or the profitability of the barrels will continue to improve as we move forward, says the CEO.