The war in Ukraine has sparked a row between the White House and the US oil industry, as many companies are reaping record profits from rising prices despite pumping less crude than before the pandemic, leaving US consumers beset by soaring gasoline prices.
President Joe Biden has urged US oil companies to increase production – but they are wary given his historic hostility to fossil fuels and the risk that new drilling will not be profitable in the long term.
Political dangers are mounting for an administration that is set to lose ground in November’s midterm elections with record inflation stinging voters even before Russia invades Ukraine.
For now, polls show most Americans support a US ban on Russian crude, even if it means higher prices at the pump. Biden pinned the rise directly on Vladimir Putin. This is “Putin’s price hike”, he said.
“His logic of where to point the blame is probably justifiable and politically intelligent,” said Marquette Law School poll director Charles Franklin. “But does that make people ignore the fact that it costs them $12 or $15 more to fill up an average car? I don’t think it takes away those economic concerns for households.
The Biden administration finds itself in the uncomfortable position of pleading with oil companies to increase crude production, despite its long-term goal of steering the United States away from fossil fuels that worsen climate change.
“We are on a war footing,” Energy Secretary Jennifer Granholm told oil executives at the CERAWeek by S&P Global conference on March 9. “We need oil and gas production to increase.”
But it’s not as simple as the oil companies turning on a tap. These companies are developing drilling plans based on economic forecasts for at least a year, when OPEC+ may have boosted production and prices may have been at a long high.
That leaves Biden in a political bind. Republicans are confident that inflation and gas prices will help them gain control of Congress despite attempts by the White House to direct voter anger elsewhere.
“Biden’s attempt to deflect blame is an insult to all American and small business owners struggling to afford the cost of everyday goods,” RNC Chair Ronna McDaniel said March 10 in a press release sent by e-mail.
Franklin, the Marquette pollster, said inflation and gas prices are “tailored issues for the opposition party” because “people feel them and you can blame the president.”
U.S. shale producers expect the oil price spike to be short-term, and shareholders don’t want companies to invest capital in robust drilling programs delivering new production in 18 months, said on March 9 Pioneer Natural Resources Co. CEO Scott Sheffield. indicate that companies would get lower prices for crude that starts flowing in 12 to 18 months.
The administration’s approach assumes oil producers will turn a dime in response to calls from the same people “telling everyone they’ll be obsolete in 30 or 40 years,” said Benjamin Salisbury, director of the research at Height Capital Markets.
Shale investors have also dismissed arguments that drillers should increase production because it is their patriotic duty. Many still bear the scars of the last boom and bust cycle, when companies chased output growth, ultimately contributing to a glut that drove prices down.
“The upstream industry is not a utility industry,” said Ben Dell, founder of Kimmeridge Energy Management. “For 10 years, we didn’t make any money. The industry is profitable for two months, and the argument is that we are supposed to lower the price of the product or give margins to support the consumer.
The Biden administration received a bit of good news on March 11 in industry data showing that shale explorers added the most rigs in a month. But the increase underscored that any improvement would be slow: the number of new active rigs was just 8, bringing the US total to 527.
It typically takes five to six months to drill and boost production in a Permian basin long before oil and gas start flowing, said Artem Abramov, head of shale research at Rystad Energy.
And that’s the best case. Currently, inflationary pressures have also created headwinds for oil production. Executives from ConocoPhillips and Occidental Petroleum Corp. cited rising costs for piping, trucks and labor as barriers to ramping up.
Three-quarters of US oil production and 86% of its gas production occur on private and public lands, not US government lands and waters.
Still, oil and gas companies held more than 9,000 approved but unused permits to drill on federal land already leased ashore as of Dec. 31, and the White House wants the industry to use them quickly.
Oil producers don’t “need an embroidered invite to drill,” White House press secretary Jen Psaki said on March 9. “There is a war. We ask them to go and use the approved permits, use the unused space and get more supply from the ground in our own country.
It is customary for companies to store two-year permits to drill individual wells on federal land, in part to better organize complex operations. Even if they abandon operations at a site after finding that it is not as productive as expected, existing permits are not lost.
Nearly 60% of federal leased acreage does not produce oil or gas, Psaki said. Yet a greater share of federal leases produce oil and gas than at any other time in the past two decades. Some 66% of federal onshore concessions were producing crude or gas in fiscal year 2021, the most recent data available.
Overall U.S. crude production, which averaged 11.7 million barrels per day in January (up 100,000 bpd from the previous month) is on track to reach record highs l next year, according to the US Energy Information Administration.
“A combination of factors is leading to a more disciplined approach to production — an approach that has made it difficult to ramp up production,” said Frank Macchiarola, senior vice president of policy at the American Petroleum Institute.
Democrats aren’t the only ones exposed to the risks of soaring oil prices. Consumers could end up blaming the oil companies, which doesn’t bode well for Republican allies in the industry.
History via transportation topics.