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Notes -
Updates on Oil and Gas
In the old place I started a conversation about rising oil and gas prices. Several people responded at the time that it was due to policy, like Biden cancelling the keystone pipeline and pressuring the adoption of green technologies. The theory was that the Biden Administration wanted to keep prices high to effect a transition to green technology. At the time I argued that it seemed very unlikely that Biden wanted gas prices high, and that these regulatory factors were an insufficient explanation for price spikes/production gluts: Obama cancelled offshore drilling and pushed green tech too and yet oil production doubled under him. @Iconochasm, who I think is no longer with us, made a prediction that oil would fall significantly anyway because fossil fuel companies would react to Biden’s opposition.
As a follow up on that prediction, in the year since this conversation oil production in the US has shot up and looks on pace to soon reach its previous heights before the Covid collapse, with prices falling correspondingly. Now I see articles like “U.S. Crude Oil Production Rebounds In January: EIA”, “America is going through an oil boom — and this time it's different”, and “U.S. Crude Oil Output Expected to Hit New Record Highs in 2023”:
It’s gotten so pronounced that environmentalist groups have even started critiquing the Biden Administration (1, 2, 3) for surpassing even Trump in their zeal for fossil fuels:
Will the outlook stay rosy? I have no idea. As I argued in previous posts I think regulatory decisions are probably less impactful than the broader global markets, and investments in new productive capacity remains low for that exact reason. So a lot of the future probably hinges on stuff like the Ukraine War and the decisions made by OPEC. Still, coupled with the fact that Biden tapped the Strategic Petroleum Reserve to depress prices, I think this largely confirms that Biden was certainly not driven by a desire to crush oil production and keep prices high for Americans. Like most Presidents, he wants voters to be happy with him.
Mostly in spite of his policies. 2010-2014 was the technologically-driven shale boom period, followed by the crash in 2014-15. The leases that facilitated this expansion were created under Bush who was a wee bit more energy industry friendly than Obama/Biden.
US oil production continued to expand under Trump, though more slowly than it did during the Shale boom and peaked in late 2019-2020 before COVID nearly bankrupted 1/3 of the US regional producers by briefly making oil prices go negative. It has taken three years for US production to get back to 95% of the peak production because it isn't just like turning on a spigot again.
Prices are slowly normalizing, but are still historically high, even adjusting for inflation. This makes very little sense to me because U.S. demand has fallen almost 10% from 2019 and almost 20% from 2005 despite returning to high production rates. I'll have to look into what is going on with global production in that time period, but that data is harder to track down and less reliable.
This analysis seems apt to me, with the exception of the Strategic Petroleum Reserve publicity stunts. Tapping the reserves to increase supply temporarily to help lower prices was nothing more than a headline generator, and was a poor decision strategically. It's selling cheap gas now to buy expensive gas in the future.
I do appreciate that the messaging from the Biden administration has moved away from "Evil Oil Companies™" to focusing pretty much exclusively on culture warring in the runup to the election. I don't think campaigning against big oil is a winning strategy when prices are still 50% higher than they were under the last Republican administration.
No it's the exact opposite, they sold when prices were high in order drive them down then bought when prices are low again. They made a cool $4 Billion on the deal.
Best financial decision the government has made in a while, huh?
Probably. I don't know if the government should be playing as a commodity trader in general but price smoothing to blunt the pain of embargos seems like a legitimate foreign policy aim. Especially when the low cost producers are foreign and the high cost producers are domestic keeping a ceiling and a floor on oil prices doesn't seem like a bad idea.
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