Some in the oil industry fear that oil prices may again return to the $100 mark, with President Joe Biden’s anti-fossil fuel stance and aggressive green agenda threatening the supply of oil and gas in the foreseeable future.
President Biden’s energy agenda has been a puzzling one, but it didn’t start off that way. At the very start of his term, President Biden was quick to cancel the Keystone XL pipeline. He suspended oil and gas leasing on federal lands, and sent a clear signal to the oil and gas industry: your days are numbered.
Now those policies may push oil prices back up to $100, as oil production in the United States is still lagging pre-pandemic levels by nearly 2 million bpd, while demand continues to tick upwards.
It’s not that oil production in the United States is stagnating. Hardly. But the slow recovery—impeded in part by Hurricane Ida—could tip the market into a shortage rather than a surplus.
Demand is already outpacing U.S. production. In 2021, U.S. crude oil inventories have shed nearly 70 million barrels.
It would be one thing if U.S. policy were pro-oil and gas. As oil prices rise, oil and gas investments would flood in, and the market would do what the market does—regulate itself. But oil investors and banks—even Big Oil companies—are desperately trying to tiptoe through the new environment. Shareholders are now spattered with activist shareholders demanding more accountability with regard to the environment. Banks are eager to display their green prowess by shunning new oil and gas projects. Oil and gas companies are leery of sinking too much money into new drills too fast in an environment that may or may not be hospitable to them in the future.
Now, the lack of investment and sluggish return of U.S. oil production could send oil prices spiking.
That’s not to say that all are on board with this call for $100 oil. Some contend that OPEC+ has its finger on the pulse of the oil industry so that oil won’t have a chance to go that high. Others, however, question how much spare capacity OPEC+ has at the ready to respond to additional demand surges.
The U.S. Energy Information Administration sees OPEC+ spare capacity reaching 5.11 million bpd in the fourth quarter of next year.
Goldman thinks $100 oil by 2023 shouldn’t be ruled out, as supply additions are expected to be simply too slow to keep up with demand—precisely the scenario we saw in 2021. Goldman’s base forecast is still $85 Brent in 2022 and 2023. But it isn’t ruling out the possibility for $100 oil, made possible by higher cost inflation for drillers or a significant supply shortfall.
Saudi Arabia warned that this underinvestment could be dangerous.
ADVERTISEMENT
No matter where the exact call for oil prices lands, one common theme exists in most oil forecasts today: there is simply not enough supply while demand is robust. And oil prices will need to go even higher if significant investments are to be made to the extent where supply can keep up with demand. How high? Well, that will depend on the policies in place to support the industry—and those policies today aren’t looking to congenial.
By Julianne Geiger for Oilprice.com
More Top Reads From Oilprice.com:
- U.S. Gasoline Prices Haven’t Peaked Just Yet
- Cocaine, Guns And Gushers: Colombia’s Oil Industry Struggles To Reactivate
- Oil Perks Up With Another Crude Inventory Draw
He only needs to watch the current energy crisis embroiling Europe to learn what a hasty energy transition at the expense of fossil fuels does to energy prices. If President Biden goes ahead with such a rash energy transition, his country could be facing a far bigger energy crisis than Europe's.
A rush toward energy transition and an incessant pressure on the global oil industry to divest of its oil and gas assets are a sure way towards a global underinvestment in oil and gas and a widening deficit between demand and supply in the market.
Therefore, it will be no surprise if the widening deficit in the market ushers $100 oil by the end of 2022 or the first quarter of 2023.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London
Comparisons with Europe are have little validity because the US does not rely on imported gas which supplies about 30% of Europe's total energy and has surged by a factor of up to 10 times for some shipments over the past year.
Further the US has huge scope for energy efficiency which can be implemented fairly quickly. Energy use per person in the US is double that of France for a similar living standards.
Another factor to note is that energy cost as a share of expenditure is lower than it was in the past so although sticker shock from rising gas prices is very much front of mind, the actual impact on the economy is lower than it used to be, particularly as most of the money recirculates through the US economy and is no longer paid to foreign oil interests.