Suppressed Production Keeps Gas Prices High
With supply low and demand high, gas prices are high and rising. However, it is not the market that drives the prices but investor demands, according to a survey of oil executives.
Rising Gas Prices
The price at the pump increased to record highs for three days in a row this week. The average price for a gallon of gas as of Friday stood at $4.43, according to the American Automobile Association (AAA). In some western states, the cost is near or tops $5 a gallon.
There are 9,173 oil drilling permits issued to oil companies on over 24 million acres of federal land. Critics, including President Biden, say those permits should be used to increase production and bring down prices. However, industry officials contend that it would take six to 12 months for wells to begin producing. That’s what is keeping oil companies from using those permits?
Capital Discipline
The Federal Reserve Bank of Dallas found that most oil executives blame investors who are responsible for tamping down drilling and keeping gas prices high.
“Slightly over half—59 percent—of executives believe investor pressure to maintain capital discipline is the primary reason that publicly traded oil producers are restraining growth despite high oil prices,” according to the bank’s Dallas Fed Energy Survey.
For decades, petroleum companies made money for their investors by drilling and producing more oil to meet growing demand. Capital discipline puts investor returns ahead of production. In other words, income is plowed back to investors in the form of dividends at the expense of increased drilling and production.
But Why?
The pandemic resulted in a sharp drop in demand for gasoline. As a result, in April 2020 crude oil prices went negative for the first time in history. That time is known as the 2020 oil bust.
In addition, the fracking boom and bust of a few years before was fresh in investors’ minds when 2020 crude prices crashed. From 2014 to 2016, fracking dramatically increased oil production. That resulted in a cataclysmic drop in prices. The price of a barrel of U. S.-produced oil fell 70 percent from $100 to $30, according to the World Bank.
Investors lost substantial sums in those two episodes. As a result, the call for capital discipline became the mantra of oil and gas investors.
What’s Ahead
Oil companies are increasing production, according to the Dallas Fed survey. However, do not expect Big Oil to lead the charge. Median production by the largest oil producers rose six percent from the fourth quarter of 2021 to the first quarter of 2022.
Smaller, independent producers are projecting 15 percent growth. Most small firms are not publicly traded. Therefore, they are not pressured by investors to keep production down.
“In the world of money, everyone lives on bended knee,” Brian Thomas, a managing director at Prudential Private Capital, told a gathering of oil executives. “The industry is beginning to kind of morph its behavior to reflect the concerns of its investor base, right or wrong.”
With U. S. production down and OPEC unwilling to ramp up supply, gas prices are expected to remain high through at least the end of the year.
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Max K. Erkiletian began writing for newspapers while still in high school. He went on to become an award-winning journalist and co-founder of the print magazine Free Bird. He has written for a wide range of regional and national publications as well as many on-line publications. That has afforded him the opportunity to interview a variety of prominent figures from former Chairman of the Federal Reserve Bank Paul Volker to Blues musicians Muddy Waters and B. B. King. Max lives in Springfield, MO with his wife Karen and their cat – Pudge. He spends as much time as possible with his kids, grandchildren, and great-grandchildren.
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