What is one thing that Iran, the UAE and Elon Musk can agree on? The world needs more oil…
— The Iranian Minister of Petroleum Javad Owji stressed the world needs more Iranian oil after the announced OPEC+ cut on oil production.
— UAE President Mohammed bin Zayed al-Nahyan, speaking at Cop 27, asserted his country would continue to supply oil and gas “for as long as the world needs” it.
— Tesla CEO Elon Musk recently told a group of European energy leaders that the world needs more oil and natural gas alongside the continuation of nuclear power plants.
U.S. President Joe Biden, who recently chided American oil companies “to deploy these record-breaking profits to increase production,” apparently shares a similar view.
President Biden had pleaded with Saudi Arabia to increase production but then OPEC+ announced production cuts. Then he tapped into the U.S. Strategic Petroleum Reserves, however that was a small stopgap measure with more political benefits than actual price benefits. That is not a critique on President Biden…messaging to the market on oil remains critical. The stats underscore this reality: oil powers more than 95% of all transportation of goods and people while hydrocarbons account for more than 80% of the world’s energy.
The sanctions on Russia further exacerbate the problem. Europe’s scramble to source alternatives to Russia’s oil and gas continues to encounter various hurdles with increasing supply constraints and prices potentially causing sustained disruption in Europe throughout the winter.
Those politicians and pundits arguing high energy prices will accelerate the “energy transition” must explain why current efforts, with billions spent in the process, still suggest that hydrocarbons will remain a necessity for, at least a few decades. Also the misnomer in the high price theory is that new energy technologies will only succeed when they are scalable at affordable prices for the public.
Can the U.S. oil and gas industry significantly increase production (as a counterbalance to Russia and potentially OPEC+)?
America’s oil and gas industries sadly are not ready to produce enough oil and gas today to fill the gap created by sanctions on Russia and tamp down prices. The world’s epiphany that more oil and gas is required is effectively seven years late as capex spending on new production is down 60% to 70% since 2015 when prices hovered below $40 per barrel. U.S. energy companies cannot procure nor invest funds in one quick deposit today to cover those missed years of investment and jumpstart production tomorrow. The industry requires continued investment over time to sustain production as output from the world’s existing wells, collectively drop about 6% per year.
But then again, the price collapses of 2014 and 2020 juxtaposed with the recent price spikes sparked by the war in Ukraine (and subsequent sanctions on Russia) does not provide certainty for operators and investors into the industry. Some economists are suggesting that OPEC+’s recent cuts could sustain prices at levels that cause a recession which, in turn, would drive down demand and subsequently prices. The brutal reality of the industry is first economic uncertainty and secondly its natural linkage to politics — this is not a natural winning mix.
Economic uncertainty is understandable…the messiness of the politics, however, less so. Today, Saudi Arabia is the villain…yesterday, it was American oil and gas companies…tomorrow, it may be the entire industry (some executives say we are already here). The state of public discourse on the sector is generally inflammatory with the usual harping on excessive profits and the public “being taken advantage of.” Industry participants will argue that “anti-oil” policies and investment in new technologies show both the potential of energy transition and the necessity for oil today and in the short term — short term being 30 years, 50 years, or longer.
And “anti-oil” policies is not a farcical creation in the mind of oil and gas executives. The Glasglow Financial Alliance for Net Zero, a global network of 500 bankers representing $150 trillion in assets, want to “phase out” financing of hydrocarbons. The U.N.’s Net Zero Banking Alliance, a group representing 40% of global banking assets, wants to cut off all capital and credit to the oil and gas industry. And, per the political nature of the industry, the alliance is under investigation in more than 15 states in the U.S. as attorney generals attempt to protect an industry viewed as economically vital to their state.
Oil executives furthermore rightfully argue that attempts to financially starve the industry ignores the aforementioned short term need and also speaks to prior successes of industry — the shale boom, for example, was an unexpected and largely revolutionized an industry that some pundits, at the time, had alleged was past its peak. Some industry executives believe digitization of the oil production is next — the industry has successfully deployed digital tools in the field for years with increasing potential for artificial intelligence (AI) and other automation tools to reduce cost to production and improve efficiency.
The industry also faces the constraints of limited terrain, which is a euphemism for saying more than 90% of the U.S. offshore acreage is off-limits to hydrocarbon exploration. Opening access is not politically tangible but a simple change in policy on a fraction of the areas adjacent to current exploration and production could boost U.S. production over time, especially with existing technologies being deployed in field (as well as technologies that may potentially come in the future).
The U.S. government will have to take a strong look at the oil and gas industry in the next several months. The industry has demonstrated an ability to be inventive, crafty and quick yet industry executives can articulate how formal policies at the federal (and state) level and informal policies via activism of climate advocates at banks and other financial institutions undercuts their ability to help the market.
Most American oil and gas executives appreciate we have a climate issue and that action has to be taken today to combat it long term. Similarly those same executives and legislators (likely with cameras and mics off) will say that a shift in policy on oil and gas production in the U.S. has to change or the country (and the world) remains at the mercy of global actors (if not OPEC+, it will be another set of countries) — this may not be the message for COP27 but it is the reality today.
