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U.S. Shale Industry To Spend $83 Billion In 2022

U.S. Shale Industry To Spend $83 Billion In 2022

US shale expenditure is projected…

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Haley Zaremba

Haley Zaremba

Haley Zaremba is a writer and journalist based in Mexico City. She has extensive experience writing and editing environmental features, travel pieces, local news in the…

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The Real Reason Big Oil Is Refusing To Boost Production

  • A stand-off between President Joe Biden and oil and gas producers in the Permian Basin is developing as prices continue to climb.
  • President Biden has accused the oil and gas industry of potentially "illegal conduct" as oil execs get rich off of soaring oil prices and has called for a federal investigation into the matter.
  •  Drillers are still holding off on increasing output in other basins as they continue to enjoy sky-high profits while looking to avoid another “boom and bust” cycle which has crippled the industry in the past. 

Over the last couple of weeks, a stand-off has been developing between President Joe Biden and shale oil and gas producers in West Texas. As soaring gas prices add pressure to cash-strapped United States residents already feeling the pressure of inflation, the economic strain is reflecting poorly on the Biden administration, which is scrambling to get someone, anyone -- be it OPEC or producers in the Permian Basin -- to open the taps and ease supply shortages. So far, however, Big Oil isn’t budging. 

There is a lot of speculation about the many reasons this may be the case. Pundits have pontificated about the political dimensions of the standoff, noting that the right-leaning fossil fuels industry has little incentive to help out an administration that they see as antithetical and threatening to their livelihoods. For his part, President Biden has accused the oil and gas industry of potentially "illegal conduct" as oil execs get rich(er) off of soaring oil prices and has called for a federal investigation into the matter.

But, according to other sources, the real reason that Big Oil won’t raise production is a matter of simple economics. Keeping the supply tight is just too good for the bottom line. And if it’s President Biden who will take the heat for high prices at the pumps, that’s just the cherry on top of a very, very lucrative cake. In fact, according to figures from Deloitte LLP, oil explorers in the United States are making more money now than at any other point in the more-than decade-long history of the nation’s shale revolution. “And this may just be the beginning,” Bloomberg Markets reported this week. “Free cash flow, the key metric watched by investors, probably will increase by 38% next year, presuming oil prices remain elevated.”

This kind of restraint is a new development for the shale industry, and it is clearly paying off. Historically, the Permian Basin has been unable to resist a “drill, baby, drill” mentality when oil prices are high, ultimately flooding the market and deflating prices. This would then be followed up by a period of production cuts and austerity measures until oil prices recovered, and then companies would buck production caps and the process would start all over again in an amazingly predictable boom and bust cycle

But no longer. “After effectively subsidizing consumers through the 2010s with break-neck drilling that depressed global oil prices, the shale industry appears to have struck a winning formula: moderating production, limiting reinvestment in new wells and shaving debt,” Bloomberg writes. As such, U.S. shale is digging its heels in and refusing to pump despite any amount of begging and pleading from the White House. Despite the fact that global energy demand has bounced back to pre-pandemic levels, U.S. oil production has stubbornly remained 12% lower than they were in February 2020, right before the impact of the pandemic was felt around the world. This represents a huge volume of supply -- a 12% contraction is the equivalent of nixing the entire oil output of the Gulf of Mexico.  

Ironically, the Permian is now poised to increase production to its highest levels on record and is projected to hit 4.95 million barrels a day this December, but the ramp-up won’t be nearly enough to close the 12% production gap. Drillers are still holding off on increasing output in other basins as they continue to enjoy sky-high profits and look toward a potential global oil glut in the next year if too much production is ramped up too quickly in the immediate term, ultimately bringing them back to that classic boom-and-bust cycle that they’re almost managed to break out of.

By Haley Zaremba for Oilprice.com

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Leave a comment
  • independence01776 d on November 18 2021 said:
    Oil's is fast hitting between a rock and a hard place. The pandemic gives a short reprise to high prices, but at $80 a barrel, petrol in US averages $3.50 per gallon, making competition from EV's very compelling as fuel economy saves 50% off the cost of operation compared to an ICE vehicle. Lower the price per barrel to $60 and the profit goes away. Even at $80 a barrel only the Permian fields are expanding as other fields break even being higher.

    Just a no win situation can't raise prices, while competition from renewable sources continue to expand rapidly with fallen prices and the availability of competitive EV's ramps up, in part driven by the political winds that support the transition and are fast turning into a hurricane to clean and green is just getting started.

    As a result, the investment flow has completely shifted over the past 5 years and we see renewable energy stocks going up like gangbusters while oil stock shares continue on a long-term decline that started back in 2015.
  • Mamdouh Salameh on November 18 2021 said:
    President Biden’s rhetoric on oil prices is contradictory. On the one hand, he wants to accelerate the United States’ energy transition at the expense of oil and gas and on the other hand he wants both OPEC+ and US shale oil producers to increase production so as to decelerate the rise in oil prices.

    For President Biden, a continued rise of prices at the pumps is hitting American in their pockets ,and adding to the economic strain thus lowering his rating among voters and could cost him re-election in four years’ time.

    OPEC+ has refused to heed President Biden’ calls to increase production beyond what it has already agreed upon for fear of tipping the global oil market towards glut.

    On the other hand, US shale oil producers are hesitant to open the oil taps because they are making good profits for the first time since the shale revolution started. Moreover, they are aware that their fate is in the hands of OPEC+ so why upsetting the organization by going back to their bad old habits of excessive and unprofitable production. They are also aware that OPEC+ could easily bring them back again to the brink of bankruptcy.

    US shale drillers also know that any additional production they can bring to the market couldn’t exceed 300,000-400,000 barrels a day (b/d) which could hardly impact global oil supplies and prices.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • Consult Sape on November 19 2021 said:
    "and it may just be the beginning"
    It is the beginning! Of the end!!!
  • Hugh Williams on November 19 2021 said:
    The switch away from petroleum may well happen but it will be slow and expensive. I am pleased that the heavily indebted oil companies are making a profit. Any claim of this being illegal will take some inventive legal work.

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