HOUSTON – Americans are spending a dollar more on a gallon of gasoline than they were a year ago. Natural gas prices have climbed more than 150% over the same period, threatening to increase the prices of food, chemicals, plastics and heating this winter.
The energy system is suddenly in crisis around the world as the cost of oil, natural gas and coal has climbed rapidly in recent months. In China, Britain and elsewhere, fuel shortages and panic buying have resulted in blackouts and long lines at gas stations.
The situation in the United States is not as dire, but oil and gasoline prices are high enough that President Biden has called on foreign producers to increase supply. He does so as he simultaneously pushes Congress to tackle climate change by moving the country away from fossil fuels to renewables and electric cars.
US energy executives, Wall Street bankers and the investors who fund them are doing nothing to raise production to levels that could lower prices. The main US oil price jumped nearly 3% on Monday, to around $ 78 a barrel, a seven-year high, after OPEC and its allies refused to significantly increase supply on Monday.
Growers are still irritated by memories of falling prices 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 rocked the industry over the past decade, but many also say they are prepared to reduce their exposure to fossil fuels to meet commitments. they took to fight climate change.
“Everyone is very suspicious because just 15 or 16 months ago we had negative oil prices at $ 30 a barrel,” said Kirk Edwards, president of Latigo Petroleum, which owns an interest in 2,000 wells. of oil and natural gas in Texas and Oklahoma. . He remembered a time when demand and storage capacity were so low that some traders paid buyers to withdraw oil from them.
If drillers do not increase production, fuel prices could remain high and even increase. This would pose a political problem for Mr. Biden. Many Americans, especially low-income families, are vulnerable to large fluctuations in oil and gas prices. And while the use of renewables and electric cars increases, it remains too low to significantly offset the pain of higher gasoline and natural gas prices.
Goldman Sachs analysts say the energy supply could tighten further, potentially raising oil prices by $ 10 before the end of the year.
This helps explain why the Biden administration pressured the Organization of the Petroleum Exporting Countries to produce more oil. “We continue to discuss with international partners, including OPEC, the importance of competitive markets and pricing and to do more to support the recovery,” Jen Psaki, Attaché, said last week. Mr. Biden’s press release.
But OPEC and its allies simply reconfirmed existing plans for a modest increase in November on Monday. They are reluctant to produce more for the same reasons that many US oil and gas companies do not want to.
Oil executives argue that while prices may appear high, there is no guarantee they will stay high, especially if the global economy weakens because coronavirus cases start to rise again. Since the start of the pandemic, 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 look high compared to 2020, but they’re not stratospheric, executives said. Prices were in the same territory in mid-2018 and are still far from the level of $ 100 a barrel they exceeded in 2014.
Largely because of industry caution, the national number of oil rigs is 528, about half of its 2019 peak. Yet, aside from recent Gulf production disruptions From Mexico in the aftermath of Hurricane Ida, oil production in the United States has almost reverted to the pre-pandemic days, with companies pulling crude from wells they drilled years ago.
Another reason for the decline in drilling is that banks and investors are reluctant to invest more money in the oil and gas sector. Wall Street’s capital flow has slowed after a decade in which investors paid more than $ 1.4 trillion to North American oil and gas producers through equity issuances and d ‘bonds and loans, according to research firm Dealogic.
“The banks have pulled out of funding,” said Scott Sheffield, managing director of Pioneer Natural Resources, a major Texas oil and gas producer.
The flow of money provided by banks and other investors had slowed even before the pandemic as shale wells often produced a lot of oil and gas in the beginning but quickly ran out. Many oil producers made little or no profit, leading to bankruptcies whenever energy prices fell.
Companies were constantly selling stocks or borrowing money to drill new wells. Pioneer, for example, did not generate cash as a company between 2008 and 2020. Instead, it used $ 3.8 billion to run its operations and make capital investments, according to the reports. company financials.
Industry executives have come to preach financial conservatism and tell shareholders that they are going to raise dividends and buy back more stocks, not borrow for big expansions. Mr Sheffield said Pioneer now intends to return 80 percent of its free cash flow, a measure of money generated from operations, to shareholders. “The model has totally changed,” he said.
Shares of oil companies, after years of decline, have skyrocketed this year. Yet investors remain reluctant to finance a large 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 equity firm. solidify. “No one is going down this road any time soon.”
This aversion to expanding oil and gas production is partly due to the growing enthusiasm of investors for renewables. Equity funds focused on investments such as wind and solar power manage $ 1.3 trillion in assets, a 40% increase this year, according to RBC Capital.
And the largest investment firms require companies to reduce emissions from their operations and products, which is much more difficult for oil and gas companies than it is for technology companies or other companies in the service industry.
BlackRock, the world’s largest asset manager, wants the companies it invests in to end up removing as much carbon dioxide from the environment as they emit, achieving what is known as net zero emissions. The New York State Mutual Fund, which manages state and local employee pension funds, has said it will stop investing in companies that do not take enough action to reduce carbon emissions.
But even some investors calling for emission reductions fear the transition from fossil fuels will push energy prices up too much and too quickly.
Mr Dell said the limited supply of oil and natural gas and the cost of investing in renewables – and storing batteries when the sun isn’t shining and the wind isn’t blowing – could raise prices. energy for the foreseeable future. “I have no doubts that you are going to experience a period of inflation in energy prices this decade,” he said.
Laurence D. Fink, chief executive officer of BlackRock, said it could undermine political support for switching off fossil fuels.
“We risk a supply crisis that increases costs for consumers – especially those who can least afford it – and risks making the transition politically untenable,” he said in a speech in July.
There are already signs of stress all over the world. Europe and Asia are short of natural gas, causing prices to rise even before the first cold in winter. Russia, a major gas supplier to both regions, has supplied less gas than its customers expected, making it difficult for some countries to replace nuclear and coal-fired power plants with gas-fired ones.
OPEC, Russia and others have been careful not to increase oil production for fear that prices will 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.
“The market is not structurally short of oil supplies,” said Bjornar Tonhaugen, head of oil markets for Rystad Energy, a Norwegian energy consultancy firm.
Helima Croft, head of global commodities strategy at RBC Capital Markets, said she expected OPEC and Russia to be willing to increase production if they saw the balance between supply and the demand “tighten up 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 the investment plans he made earlier this year to drill just eight new wells in the past eight months.
“Just because prices have jumped for a month or two doesn’t mean there will be a scramble for drilling rigs,” he said. “Industry always goes up and down. “
Clifford Krauss reported from Houston and Peter Eavis from New York.