Why $4-a-gallon gas may be coming
Even as oil and gasoline prices rise, industry executives are resisting their usual impulse to pump more oil out of the ground, which could keep energy prices moving up as the economy recovers.
The oil industry is cyclical: When oil prices climb, producers race to drill — until the world is swimming in petroleum and prices fall. Then, energy companies that overextended themselves tumble into bankruptcy.
That wash-rinse-repeat cycle has played out repeatedly over the last century, three times in the last 14 years alone. But, at least for the moment, oil and gas companies are not following those old stage directions.
An accelerating rollout of vaccines in the United States is expected to turbocharge the U.S. economy this spring and summer, encouraging people to travel, shop and commute. In addition, President Joe Biden’s coronavirus relief package will put more
money in the pockets of consumers, especially those who are still out of work.
Even before Congress approved that legislation, oil and gasoline prices were rebounding after last year’s collapse in fuel demand and prices. Gas prices have risen about 35 cents a gallon on average over the last month, according to the AAA motor club, and could reach $4 a gallon in some states by summer. While overall inflation remains subdued, some economists are worried that prices, especially for fuel, could rise faster this year than they have in some time. That would hurt working-class families more because they tend to drive older, less efficient vehicles and spend a higher share of their income on fuel.
In recent weeks oil prices have surged to more than $65 a barrel, a level that would have seemed impossible only a year ago, when some traders were forced to pay buyers to take oil off their hands. Oil prices fell by more than $50 a barrel in a single day last April, to less than zero.
That bizarre day seems to have become seared into the memories of oil executives. The industry was forced to idle hundreds of rigs and throttle many wells shut, some for good. Roughly 120,000 American oil and gas workers lost their jobs over the last year or so, and companies are expected to lay off 10,000 workers this year, according to Rystad Energy, a consulting firm.
Yet even as they are making more money thanks to the higher prices, industry executives pledged at a recent energy conference that they would not expand production significantly.
“I think the worst thing that could happen right now is U.S. producers start growing rapidly again,” Ryan Lance, chair and chief executive of ConocoPhillips, said at the IHS CERAweek conference, an annual gathering that was virtual this year.
Scott Sheffield, CEO of Pioneer Natural Resources, a major Texas producer, predicted U.S. production would remain flat at 11 million barrels a day this year, compared with 12.8 million barrels immediately before the pandemic took hold.
Even OPEC and allied producers like Russia surprised many analysts this month by keeping several million barrels of oil off the market. OPEC’s 13 members and nine partners are pumping roughly 780,000 barrels of oil a day less than at the beginning of the year, even though prices have risen by 30 percent in recent months.
“The discipline to support higher prices is needed for the recovery of their economies,” said René Ortiz, a former secretarygeneral of OPEC who is now Ecuador’s energy minister, adding that many of the group’s members needed higher oil prices to balance their budgets and service their debts. “Their reserves have been drained.”
The decision to keep production restrained was principally the work of Saudi Arabia and its closest Persian Gulf allies and was a reversal of their position from just a few years ago. In late 2014, as oil prices began to sag as U.S. oil production surged, Saudi Arabia and OPEC cranked up production, sending prices plummeting. The cartel seemed to want to undercut drilling in U.S. shale fields, particularly in Texas and North Dakota.
But the U.S. oil industry was far more resilient than Saudi officials expected, and U.S. production continued to rise as companies cut costs. While many shale companies were hurt by OPEC’s move and oil prices never completely recovered, the economies of Saudi Arabia and other oil-dependent nations were damaged far more than the United States.
Chevron said it would spend $14 billion to $16 billion a year on capital projects and exploration through 2025. That is several billion dollars less than the company spent in the years before the pandemic as the company focuses on producing the lowest-cost barrels.
“So far, these guys are refusing to take the bait,” said Raoul LeBlanc, a vice president at IHS Markit, a research and consulting firm. But he added that the investment decisions of American executives could change if oil prices climb much higher. “It’s far, far too early to say that this discipline will last.”