When President Joe Biden first called on OPEC to increase production earlier this year, he drew an angry response from Texas Governor Greg Abbott, who told Biden to "back off" and let American companies take care of the supply problem that was pushing fuel prices higher. The awkward relationship between the current administration in Washington and the oil industry, which tends to lean to the right politically, has been highlighted repeatedly in the media along with Biden's anti-oil moves such as the killing of the Keystone XL pipeline project and the temporary moratorium on oil and gas drilling on federal lands.
Yet political incompatibility alone cannot stand in the way of profiting from higher prices, so it is hardly the only - or even an important - reason for the U.S. oil industry's production restraint amid soaring prices for both crude and products. In fact, there are at least two more important reasons for this restraint.
The first is that especially shale drillers are raking in much fatter profits right now at current production levels. According to Deloitte calculations cited by Bloomberg's Kevin Crowley, U.S. shale operators are currently booking the biggest profits since the start of the shale revolution. And that's saying something. The reason the shale play development earned the name revolution was that it happened so quickly, and it happened so quickly because it was profitable, for a time.
By booking higher profits, shale drillers - at least the public ones among them - can keep their shareholders happier than they have been in years during the cash-burning phase of the shale revolution when everyone raced to boost output by the most, contributing to the two latest price crashes.
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Speaking of crashes, the other reason shale drillers are practicing restraint is OPEC. The cartel has already demonstrated twice that it has the power to cause a collapse in prices that may its members but seems to hurt U.S. shale producers more. After several waves of bankruptcies, shale drillers appear to have decided on a different approach to production, betting on fatter profits instead of higher production.
Be that as it may, production in the U.S. shale patch is rising. Reuters reported earlier this week that production at the Permian was about to set a record, surpassing its pre-pandemic production levels next month. That's because the Permian has been the darling of the shale industry for years now, sporting some of the lowest production costs in some areas, drawing in more capital than other shale plays.
Overall production is also on the rise. According to the Energy Information Administration's latest weekly industry update, the U.S. was producing 11.5 million bpd of crude, which puts it in the first place globally and represents a 1-million-bpd increase on the year. It is lower than the record 13-million-bod production rate right before the pandemic struck, but it is no small potatoes by any means.
And, perhaps surprisingly to some, the industry is not averse to working with the federal administration to make gasoline more affordable. The messages coming from shale oil are not all in the same tone but they do tend to be encouraging.
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The chief executive of Occidental Petroleum, for instance, was quite blunt in telling Biden to "back off" the U.S. oil industry rather than calling on OPEC to increase oil production so U.S. drivers can pay less at the pump. The president, Scott Sheffield, said earlier this month that Biden has "got to back off his rhetoric on federal leases going forward."
Occidental's Vicki Hollub was more delicate this week, when she said, in response to a question on whether Biden was wrong to call on OPEC to boost output, "if I were gonna make a call, it wouldn't be long-distance, it would be a local call."
"I think first you, you stay home, you ask your friends, and you ask your neighbors to do it. And then if we can't do it, you call some other countries," Hollub told CNBC.
By Irina Slav for Oilprice.com
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Irina is a writer for Oilprice.com with over a decade of experience writing on the oil and gas industry. More
Comments
Moreover, shale drillers are aware that their fate is in the hands of OPEC+ so why upsetting the organization by reverting to their bad old habits of excessive and unprofitable production aimed at undermining OPEC+’s policies of stabilizing the global oil market and ensuring reasonable crude oil prices for everyone including themselves. They are also aware that OPEC+ could easily bankrupt them.
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