NOTE­BOOK

Higher oil de­mand is needed to end the glut, but will it come?

Houston Chronicle Sunday - - FUEL FIX - ly­dia.de­pil­lis@chron.com twit­ter.com/ly­di­ade­pil­lis

At var­i­ous points over the past year, hopes have risen that pro­duc­tion cuts by OPEC would suc­ceed in drain­ing the world’s oil in­ven­to­ries enough to bring prices into the $55-per-bar­rel range needed for U.S. pro­duc­ers to re­ally get mov­ing again.

Those hopes have been dashed con­sis­tently, with prices lin­ger­ing be­low $50, and now econ­o­mists at the Dal­las Fed­eral Re­serve say that the sup­ply glut is likely to con­tinue far into next year. That’s bad news for Hous­ton’s oil-bound econ­omy, which may not see the strong re­cov­ery that some have an­tic­i­pated.

The cul­prits in all this are U.S. shale drillers. Over the past year or so, they have more than dou­bled the rig count, bring­ing so much sup­ply on­line that the mar­ket has yet to tighten enough to force prices up — even as the OPEC-led coali­tion of oil pro­duc­ers ex­tends out­put cuts of 1.8 mil­lion bar­rels per day into next year. (Ro­bust oil ship­ments from Libya and Nige­ria aren’t help­ing, ei­ther.)

“There is sub­stan­tial agree­ment that U.S. frack­ing ac­tiv­ity has moved too far and too fast, grow­ing U.S. pro­duc­tion at an un­eco­nomic pace,” Bill Gilmer, a re­gional econ­o­mist at the Univer­sity of Hous­ton’s Bauer School of Busi­ness, said re­cently. “U.S. pro­duc­ers are again chas­ing eq­uity gains at the ex­pense of long-run prof­its, just as they did from 2012 to 2014.”

In case you need a re­minder, 2014 was the be­gin­ning of the worst oil bust in a gen­er­a­tion, as a glut of oil set off a two-year dive that sent oil prices tum­bling from more than $100 a bar­rel to less than $30. So why are shale pro­duc­ers act­ing in this “un­eco­nomic” way again?

Gilmer ex­plained that a com­bi­na­tion of easy credit, still-de­pressed oil ser­vic­ing costs, and the abil­ity to hedge prices in the futures mar­ket is driv­ing oil com­pa­nies to keep drilling. A few of those fac­tors should fade, as low yields make drilling projects less at­trac­tive to in­vestors and oil field ser­vices com­pa­nies start to charge more (es­pe­cially con­sid­er­ing the mount­ing dif­fi­culty of finding work­ers).

What would re­ally boost oil prices, how­ever, is an in­crease in global de­mand, which is not com­ing on as strong as the oil in­dus­try might hope. The lat­est pro­jec­tion from the U.S. En­ergy Depart­ment fore­casts en­ergy con­sump­tion in In­dia and China will rise, but only mod­er­ately.

In the U.S., mean­while, Pres­i­dent Don­ald Trump re­cently cel­e­brated low oil prices as good for con­sumers.

“Gas prices are the low­est in the U.S. in over 10 years!” he tweeted last week. “I would like to see them go even lower.”

De­spite those low prices, de­mand for gaso­line from Amer­i­can mo­torists con­tin­ues to slump, ac­cord­ing to the En­ergy Depart­ment, in large part be­cause of im­proved fuel ef­fi­ciency. Long term, in­creases in elec­tric, hy­brid and self-driv­ing ve­hi­cles are ex­pected to dampen oil de­mand fur­ther.

So, bar­ring big sup­ply shocks or an un­ex­pected eco­nomic boom, any­body who lives or dies by the price of oil might want to set­tle in for a long slog.

“There is sub­stan­tial agree­ment that U.S. frack­ing ac­tiv­ity has moved too far and too fast.” Bill Gilmer, the Univer­sity of Hous­ton’s Bauer School of Busi­ness

LY­DIA De­PIL­LIS

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