HOUSTON – Americans are spending a dollar more on a gallon of gasoline than they did a year ago. Natural gas prices have skyrocketed by more than 150 percent over the same period and are threatened with rising prices for food, chemicals, plastic and heating this winter.
The global energy system is suddenly in a crisis as the prices for oil, natural gas and coal have risen rapidly in recent months. In China, the UK and elsewhere, fuel shortages and panic buying have resulted in blackouts and long lines at gas stations.
The situation in the United States isn’t quite that bad, but oil and gasoline prices are high enough that President Biden has urged foreign producers to step up supply. He does this while urging Congress to address climate change by shifting the country from fossil fuels to renewables and electric cars.
US energy managers and the Wall Street bankers and investors who fund them are doing nothing to raise production to levels that could bring prices down. The main oil price in the US rose nearly 3 percent on Monday to around $ 78 a barrel, a seven-year high after OPEC and its allies rejected a significant increase in supply on Monday.
Producers are still scrubbing memories of the price crash at the start of the pandemic. Wall Street is even less enthusiastic. Not only have banks and investors lost money in the boom-bust cycles that have shaken the sector for the past decade, but many say they are ready to reduce their exposure to fossil fuels in order to meet their commitments Fight against climate change.
“Everyone is very cautious because only 15 or 16 months ago we had negative oil prices of $ 30 a barrel,” said Kirk Edwards, president of Latigo Petroleum, which has interests in 2,000 oil and natural gas wells in Texas and Oklahoma. He recalled a time when there was so little demand and storage capacity that some traders paid buyers to buy the oil from them.
If the drills don’t increase production, fuel prices could stay high and even rise. That would be a political problem for Mr Biden. Many Americans, especially low-income families, are vulnerable to large swings in oil and gas prices. And while the use of renewable energies and electric cars increases, it remains too low to meaningfully offset the pain of higher gasoline and natural gas prices.
Goldman Sachs analysts say energy supplies could continue to tighten, which could add $ 10 to oil prices by the end of the year.
This helps explain why the Biden government is pushing the Organization of Petroleum Exporting Countries to produce more oil. “We continue to talk to international partners, including OPEC, about the importance of having competitive markets and setting prices, and we are doing more to support the recovery,” said Jen Psaki, Mr. Biden’s press secretary last week.
But OPEC and its allies on Monday only confirmed existing plans for a modest increase in November. They are reluctant to produce more for the same reasons that many U.S. oil and gas companies are unwilling to do so.
Oil managers claim that while prices may seem high, there is no guarantee they will stay high, especially if the global economy slows as coronavirus cases pick up again. Since the pandemic began, the oil industry has laid off tens of thousands of workers and dozens of companies have gone bankrupt or gone into debt.
Oil prices may seem high compared to 2020, but they’re not stratospheric, executives said. Prices were in the same range in mid-2018 and are still a long way from the $ 100 a barrel level they exceeded in 2014.
Largely due to the industry’s caution, the nationwide number of rigs producing oil is 528, roughly half of its 2019 peak. However, aside from the recent disruption to production in the Gulf of Mexico by Hurricane Ida, US oil production has recovered almost to prepandemic days as companies extract crude oil from wells drilled years ago.
Another reason for the withdrawal from the wells is the reluctance of banks and investors to put more money into the oil and gas business. Wall Street’s capital flow has slowed to a trickle after a decade of investing over $ 1.4 trillion in stock and bond issues and loans to North American oil and gas producers, according to research firm Dealogic.
“The banks have pulled out of funding,” said Scott Sheffield, CEO of Pioneer Natural Resources, a large oil and gas producer in Texas.
The flow of money from banks and other investors had slowed before the pandemic because shale wells often produced a lot of oil and gas initially, but were quickly depleted. Many oil producers made little or no profit, which led to bankruptcies when energy prices fell.
Companies were constantly selling stocks or borrowing money to drill new wells. For example, Pioneer did not generate cash as a company between 2008 and 2020. Instead, it spent $ 3.8 billion on its operations and capital investments, according to the company’s financial statements.
Industry executives have come to preach financial conservatism and tell shareholders that they will be increasing dividends and buying back more shares rather than borrowing for big expansions. Mr Sheffield said Pioneer now intends to return 80 percent of its free cash flow, a measure of the money generated from its operations, to shareholders. “The model has changed completely,” he says.
Oil company stocks have soared this year after years of decline. Still, investors are reluctant to finance a major expansion in production.
With oil and gas exploration and production companies taking a cautious approach and returning money to shareholders, the first company “to deviate from this strategy will be vilified by public investors,” said Ben Dell, managing director of Kimmeridge, an energy-focused private company. Equity firm festivals. “Nobody will go this way so quickly.”
This reluctance to expand oil and gas production is driven in part by investors’ growing enthusiasm for renewable energy. Equity funds that focus on investments like wind and solar power manage $ 1.3 trillion in assets, according to RBC Capital, up 40 percent this year.
And the largest investment firms are demanding that companies reduce emissions from their operations and products, which is much more difficult for oil and gas companies than for technology companies or other service companies.
BlackRock, the world’s largest wealth manager, wants the companies it invests in to ultimately remove as much carbon dioxide from the environment as they emit, achieving what are known as net zero emissions. The New York State Common Retirement Fund, which manages state and local government pension funds, has announced that it will no longer invest in companies that fail to take sufficient steps to reduce carbon emissions.
But even some investors pushing for emissions reductions are concerned that the move away from fossil fuels could push energy prices up too quickly.
Dell said the limited supply of oil and natural gas and the cost of investing in renewables – and battery storage when the sun isn’t shining and the wind isn’t blowing – could increase energy prices for the foreseeable future. “I am convinced that this decade will see you see a period of rising energy prices,” he said.
Laurence D. Fink, chairman and chief executive of BlackRock, said it could undermine political support for a move away from fossil fuels.
“We risk a supply crisis that drives up costs for consumers – especially those who can least afford it – and the risk of making the transition politically unsustainable,” he said in a July speech.
There are already signs of stress around the world. In Europe and Asia, natural gas is running out, so prices rise even before the first winter cold. Russia, a major gas supplier to both regions, has delivered less gas than its customers expected, making it difficult for some countries to replace nuclear and coal-fired power plants with gas-powered ones.
OPEC, Russia and others have been careful not to increase oil production for fear that prices could fall if they flood the market. Saudi Arabia, the United Arab Emirates, Russia and a few other producers have around eight million barrels of spare capacity.
“Structurally, the market has no shortage of oil,” said Bjornar Tonhaugen, Head of Oil Markets at Rystad Energy, a Norwegian energy consultancy.
Helima Croft, head of global commodities strategy at RBC Capital Markets, said she expected OPEC and Russia to be ready to ramp up production when they see the balance between supply and demand “tightening from here.”
If OPEC increases production, US producers like Mr. Edwards of Latigo Petroleum will be even more reluctant to drill. So far, he has stuck to his investment plans forged earlier this year of drilling only eight new holes in the past eight months.
“Just because prices have skyrocketed for a month or two doesn’t mean there will be an onslaught of oil rigs,” he said. “The industry is always going up and down.”
Clifford Krauss reported from Houston and Peter Eavis from New York.