OIL PATCH REPORT: U.S.A.

By Bruce Lantz

The United States oil and gas industry is striving to meet demand in the face of dwindling supply, and along the way is being wrongly accused of being responsible for high fuel prices at the pumps.

But experts are placing most of the blame on the administration of U.S. President Joe Biden, who has killed projects and imposed regulations that hamper the sector’s ability to meet demands.

With oil this week hitting US$114 a barrel before dropping to $112, and U.S. Federal Reserve chairman Jerome Powell pledging to increase interest rates as high as necessary to stifle rising inflation – already at a 40-year high of 8.5% though well below Turkey, the world’s highest at 61.1% – which he said threatened the nation’s economic foundation, there’s no end in sight for the turmoil.

While gasoline surged to a new record of an average of $6.33 a gallon and diesel prices have doubled in just a year, even though the nation has the ninth-most oil reserves in the world, U.S. spot power and natural gas prices have soared to their highest level in more than a year in several parts of the country as consumers cranked up air conditioners to escape an early spring heatwave. Gas futures already were trading near a 13-year high as much higher prices in Europe and Asia kept demand for U.S. liquefied natural gas exports strong, especially since Russia’s invasion of Ukraine.

How important is it? The oil and gas industry supports the American economy like no other, spurring economic growth through hundreds of billions of dollars invested annually in the U.S., and averaging more than $100 billion a year from foreign operations. It normally provides 10.3 million jobs and almost 8% of the nation’s gross domestic product – though that dropped 12% with the onset of the pandemic – and delivers tens of millions of dollars every day to the federal treasury in the form of rents, royalties, bonus payments and income tax payments. Plus industry wages top $100,000, 85% higher than the average private sector salary.

THE BIDEN IMPACT

The blame for rising gasoline and diesel prices is being largely – and wrongly – laid at the doorstep of the oil companies that distribute these products, with even President Biden slamming them for diverting capital toward shareholders instead of using it for more drilling to raise oil supplies which presumably would lower prices.

He has attempted to push Saudi Arabia to increase production, and then sought the same from Venezuela, apparently without results, then twice authorized tapping into the Strategic Petroleum Reserve and authorized refiners to keep the E-15 blend to increase fuel supplies for the summer driving season. Conversely, his administration recently cancelled the remaining offshore oil and gas lease sales for the year, including a planned sale in Alaska’s Cook Inlet and two in the Gulf of Mexico. And of course, the president has used the Russian invasion of Ukraine as another factor in the high cost of driving, a weak link but one with  some impact as the loss of Russian supplies and ensuing embargoes stressed an already tight situation globally.

But his attempt to deflect blame for high prices and the attempt to flood the market with oil are both seen as failures, leaving people wondering about the primary source of cost inflation.

That prompted a strong response from the Independent Petroleum Association of America (IPAA).

“The Biden Administration’s national energy strategy is not strategic, and it doesn’t benefit the nation,” said IPAA chief operating officer Jeff Eshelman in a news release. “What it does do is drive energy costs up, puts our national security at risk and further pushes the nation into high inflation and a failing economy.”

Eshelman said the administration hasn’t indicated when it will release the next five-year plan for offshore development, leaving oil and gas producers in “limbo-land” with little chance they will put financial and other resources towards future offshore development without some clarity on it.

“The administration is not even trying to apply a band-aid to our energy challenges,” he said. “They are just letting consumers and the nation bleed.”

REAL CAUSES

The debate rages as to whether the historic high gasoline and diesel prices, now 50% higher than the last time crude oil topped $100 per barrel, are the direct result of high oil prices.

Certainly there has been a reduction in refining capacity, which in 2020 declined by about 900,000 barrels of oil per day due to plant closures, with demand reduced in the first half of the year, thanks to the coronavirus. Now, the industry has almost matched 2019 volumes. But thanks to the loss of product produced by Russia due to the U.S. embargo against it, there is a gap between demand and supply of 4-5 million barrels of oil equivalent per day. That hasn’t hurt Russia. The International Energy Agency says Russian oil export revenue is up 50% since the start of the year, generating $20 billion a month.

Inventories in the U.S. are also down substantially below five-year averages, holding in a 410-420 million barrel range since Q4 of last year – about a 17-day supply. The 36 member countries of the Organization for Economic Co-operation and Development are also suffering from the same problem, holding just a 60-day supply.

Another factor is exports. The U.S. is exporting more than ever before, in the neighborhood of a million barrels a day, as the industry offers supply to offset European refinery closures that shut down several hundred thousand barrels or were converted to biofuels.

Thus, surging demand is faced with low inventories, pushing prices higher. Then there is the federal government’s monetary strategy which has keep interest rates artificially low since the financial meltdown of 2008, creating asset bubbles of various classes, especially in stocks, which has seen the DOW index rising to nearly 37,000 in recent months from 7,000 in early 2009. With federal money pouring into the stock market inflation was kept in check by an ample supply of goods and services but that began overturning with the Covid-19 shutdown in March 2020 that affected supply chains and logistics causing bottlenecks and backups that created gaps between surging demand and the supply, which saw inflation rising from 0.5% in 2020 to the present day.

WHAT’S NEXT

As the U.S. Federal Reserve continues to shift away from its policy of accommodation to remove excess liquidity by increasing the discount rate it charges lending institutions, interest rates paid by both consumers and corporations will jump, reducing demand for virtually everything, including petroleum refined products. That reduced demand could relieve upward pressure on fuel prices, but the other factors in play will affect any significant reductions.

Meanwhile the government’s mixed messages, overregulation and reduced leasing opportunities leave in question the future supply of crude oil.

At present, drilling rigs have increased in the past nine weeks to 728, up 60%, still well below the record rig count of 1,919 in 2012 but up from the record low of 433 in 2020. Now there are 576 oil rigs, the most since March 2020, and 150 natural gas rigs, the most since September 2019. More than half are in the Permian shale in West Texas and eastern New Mexico, but production remains about a million barrels per day below the 2019 record. Most work is being done by smaller private companies that can react more quickly than publicly-traded ones who are still striving to pay down debt and give shareholders dividends. But investment in the Permian is expected to reach $25.7 billion this year, more than 40% above 2021 levels.

Despite concerns that the U.S. lifting a ban on negotiating oil licences with foreign countries could lead to more crude oil hitting the market, the government insists it is doing the right thing. Federal Reserve chairman Jerome Powell recently pledged that the central bank would ratchet up interest rates as high as needed to quell a surge in inflation that he said threatened the foundation of the economy.

The Biden administration has not ruled out placing sanctions on countries that purchase Russian oil, but is being careful about impacts on oil markets.

The U.S., Britain and Canada have banned purchases of Russian oil but Washington has not placed so-called secondary sanctions on countries that buy Russian oil, the type of measures it has slapped on countries that buy oil from Iran.

“The administration is going to be making decisions in that vein… I’m not telegraphing, that’s their call,” U.S. Energy Secretary Jennifer Granholm told reporters in Washington.

Countries such as India and China continue to buy oil from Russia, which ultimately helps fund the war effort. India, the world’s No. 3 oil importer, boosted Russian oil imports in April to about 277,000 barrels per day, up from 66,000 bpd in March as refiners grab cheaper oil shunned by many Western countries and companies. China is also buying heavily discounted Russian barrels.

But such secondary sanctions would boost global prices for oil at a time when the administration is sensitive about record high gasoline prices despite Biden’s release of record amounts of oil from the Strategic Petroleum Reserve. With congressional elections looming in November, that’s a worry.

“That will obviously create additional price pressures . . . We don’t want our citizens to be hurting” from high fuel bills, Granholm said.