The powerful irruption of the shale oil industry (shale oil) and in the US generated an energy mirage that seemed very real. American technology and entrepreneurial audacity had once again come to the rescue of consumers who were paying exorbitant prices for fuel. Many studies were published that, since the fracking industry would respond to the incentives (prices) by producing more oil when oil exceeded 40-50 dollars. However, this miracle, which put OPEC+ on the ropes, seems to be fading, leaving the world once again at the mercy of the great oil cartel.
Oil has come close to reaching $140 per barrel in 2022, an area that was presumed unattainable just two or three years ago. OPEC and Russia had been losing market share for years in favor of the US oil industry, thanks to shale oil and constant improvements in fracking techniques, which allowed oil to be extracted at relatively low costs. Crude oil production in the US multiplied by more than two between 2011 and 2019, helping to lower the price of ‘black gold’ from 100 dollars in 2014 to a range of 40 and 70 (average price of Brent in 2015-2019) .
Gas extraction through fracking vs. conventional
Everything was perfect. The oil industry in the US (the incentives generated by prices), against the OPEC cartel, which only sought to maximize its profit, taking part of the cake from the consumer, who paid inflated prices. “U.S. oil and gas production soared during the years leading up to the pandemic. From 2011 to 2019, oil extraction more than doubled and natural gas production increased 50%… this increased production was a consequence largely from productivity gains through broader adoption of fracking technologies,” said New York Fed researchers Matthew Higgins and Thomas Klitgaard.
However, the behavior of the American oil industry seems to be changing, according to these New York Fed researchers. These experts show that there is a disconnect between profits and productivity. American companies are focused on rewarding shareholders, taking advantage of the rise in oil prices, and have forgotten to invest. Meanwhile, oil approaches $100 again amid war in Ukraine
Although oil prices have soared, “US oil production has recovered very slowly from the slump during the pandemic… Our analysis in this post suggests that slower productivity growth and investor demand of higher yields have made US companies willing to increase production only when the price of oil reaches a higher threshold,” Higgins and Klitgaard write.
Why don’t fracking and shale oil obey market forces as before? The start of the pandemic caused energy prices to plummet, causing production, investment and exploration to be cut because it was not profitable at those prices (they became negative). But prices recovered, and by March 2021, a barrel of oil had risen to $63 above the 2019 average. Natural gas prices topped their 2019 average even faster in late 2020. oil and gas then continued with an upward trend.
By contrast, US production and investment were slow to recover, despite rising prices. Crude oil production in June 2022 was about 7% below its level in early 2020. Gas production was just above that level. And real capital spending in the second quarter for oil and gas extraction was down 15% from its pre-pandemic pace.
The oil industry thinks so
Why have US output and capital spending responded so slowly? These experts see up to three related explanations, with important implications for future oil and gas production. On the one hand, they highlight “uncertainty. Before Russia’s invasion of Ukraine, there were plausible scenarios in which oil prices could fall: another pandemic-induced slowdown, and Venezuela, or increased production from Saudi Arabia.” In this sense, the producers considered the considerable losses in 2015 and 2020 and were reluctant to expand”, these experts assure.
On the other hand, there is the ambition of the owners of the oil companies who want to receive a return on their investment. Now that oil is close to 100 dollars, they would be taking advantage to distribute a greater part of the benefit to the detriment of investment in new production. The economists of the NY Fed give the example of the first quarter of 2022, which asked companies about the factors that slow down production. The most common response was investor pressure to maintain high yields, at almost 60%. “Keeping capital spending low leaves more money to return to investors as dividends or to pay off debt. This pressure from investors for ‘capital discipline’ is, of course, related to uncertainty,” the Fed said. NY.
It is also fair to remember that some experts in the sector blame this behavior on legislative changes in favor of renewable energy and the criminalization of fossil fuels, which has generated great uncertainty in the industry, probably weighing down its investment.
Another explanation is that companies fear that productivity growth will not be able to maintain the rates seen in the past. This has begun to be observed in recent years. Total factor productivity growth in industry slowed to 2.3% per year during the 2016-2019 period, which is still an impressive pace, but well below the 10% seen during the 2011-2019 period. 2016. “The slowdown likely reflects the mature and now nearly universal adoption of technologies coming from fracking,” the New York Fed experts explain.
All of the above is changing the plans of the owners of these companies. The Dallas Fed survey mentioned above also asked companies what price it would take for the industry to expand again: “About 41% of companies said it would take $80-100 a barrel for oil. 29% cited a price above $100-120 per barrel or more (the rest said the decision was not price dependent).” Years ago, companies were willing to invest with $50-60 a barrel, but now they seem to be prioritizing profits. This will have implications for the world oil market, since the US produces around 12% of all oil.
The result of this trend will be a permanently more expensive oil worldwide. “This shift to a higher price threshold has global implications. During the 2010s, US companies played a key role in keeping global energy prices low, through their enormous contribution to the growth of global energy production. gas and energy. In fact, the Department of Energy estimates that 75% of the increase in global production of liquid fuels between 2010 and 2019 came from increased production in the US, “says the Fed analysis.
Slower productivity growth and investor demand for higher yields could prevent the same from happening in coming years. The result may be a persistently higher floor for global energy prices. the NY Fed.
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