HOUSTON — Even as oil and gasoline prices rise, industry executives are resisting their usual impulse to pump more oil out of the ground, which could keep energy prices moving up as the economy recovers.
The oil industry is predictably cyclical: When oil prices climb, producers race to drill — until the world is swimming in petroleum and prices fall. Then, energy companies that overextended themselves tumble into bankruptcy.
That wash-rinse-repeat cycle has played out repeatedly over the last century, three times in the last 14 years alone. But, at least for the moment, oil and gas companies are not following those old stage directions.
An accelerating rollout of vaccines in the United States is expected to turbocharge the American economy this spring and summer, encouraging people to travel, shop and commute. In addition, President Biden’s pandemic relief package will put more money in the pockets of consumers, especially those who are still out of work.
Even before Congress approved that legislation, oil and gasoline prices were rebounding after last year’s collapse in fuel demand and prices. Gas prices have risen about 35 cents a gallon on average over the last month, according to the AAA motor club, and could reach $4 a gallon in some states by summer. While overall inflation remains subdued, some economists are worried that prices, especially for fuel, could rise faster this year than they have in some time. That would hurt working-class families more because they tend to drive older, less efficient vehicles and spend a higher share of their income on fuel.
In recent weeks oil prices have surged to over $65 a barrel, a level that would have seemed impossible only a year ago, when some traders were forced to pay buyers to take oil off their hands. Oil prices fell by more than $50 a barrel in a single day last April, to less than zero.
That bizarre day seems to have become seared into the memories of oil executives. The industry was forced to idle hundreds of rigs and throttle many wells shut, some for good. Roughly 120,000 American oil and gas workers lost their jobs over the last year or so, and companies are expected to lay off 10,000 workers this year, according to Rystad Energy, a consulting firm.
Yet, even as they are making more money thanks to the higher prices, industry executives pledged at a recent energy conference that they would not expand production significantly. They also promised to pay down debt and hand out more of their profits to shareholders in the form of dividends.
“I think the worst thing that could happen right now is U.S. producers start growing rapidly again,” Ryan Lance, chairman and chief executive of ConocoPhillips, said at the IHS Markit CERAweek conference, an annual gathering that was virtual this year.
Scott Sheffield, chief executive of Pioneer Natural Resources, a major Texas producer, predicted that American production would remain flat at 11 million barrels a day this year, compared with 12.8 million barrels immediately before the pandemic took hold.
Even the Organization of the Petroleum Exporting Countries and allied producers like Russia surprised many analysts this month by keeping several million barrels of oil off the market. OPEC’s 13 members and nine partners are pumping roughly 780,000 barrels of oil a day less than at the beginning of the year even though prices have risen by 30 percent in recent months.
“The discipline to support higher prices is needed for the recovery of their economies,” said René Ortiz, a former secretary general of OPEC who is now Ecuador’s energy minister, adding that many of the group’s members needed higher oil prices to balance their budgets and service their debts. “Their reserves have been drained.”
The decision to keep production restrained was principally the work of Saudi Arabia and its closest Persian Gulf allies and was a reversal of their position from just a few years ago. In late 2014, as oil prices began to sag as American oil production surged, Saudi Arabia and OPEC cranked up production, sending prices plummeting. The cartel seemed to want to undercut drilling in U.S. shale fields, particularly in Texas and North Dakota.
But the U.S. oil industry was far more resilient than Saudi officials expected, and American production continued to rise as companies cut costs. While many shale companies were hurt by OPEC’s move and oil prices never completely recovered, the economies of Saudi Arabia and other oil-dependent nations were damaged far more than the United States.
But the temptation to produce more when prices rise has not disappeared completely, especially for countries, like Colombia and Guyana, that want to pump as much oil as they can before rising concerns about climate change reduce the demand for fossil fuels in favor of electric and hydrogen-powered vehicles. Russia has been pressing Saudi Arabia to loosen production caps, while Kazakhstan, Iraq and several other countries are exporting more. Even Iran and Venezuela, which have struggled to sell oil because of U.S. sanctions, are beginning to export more.
Some analysts expect that when OPEC and its allies meet again next month, they will allow more production, which could drive down prices.
Frequently Asked Questions About the New Stimulus Package
The stimulus payments would be $1,400 for most recipients. Those who are eligible would also receive an identical payment for each of their children. To qualify for the full $1,400, a single person would need an adjusted gross income of $75,000 or below. For heads of household, adjusted gross income would need to be $112,500 or below, and for married couples filing jointly that number would need to be $150,000 or below. To be eligible for a payment, a person must have a Social Security number. Read more.
Buying insurance through the government program known as COBRA would temporarily become a lot cheaper. COBRA, for the Consolidated Omnibus Budget Reconciliation Act, generally lets someone who loses a job buy coverage via the former employer. But it’s expensive: Under normal circumstances, a person may have to pay at least 102 percent of the cost of the premium. Under the relief bill, the government would pay the entire COBRA premium from April 1 through Sept. 30. A person who qualified for new, employer-based health insurance someplace else before Sept. 30 would lose eligibility for the no-cost coverage. And someone who left a job voluntarily would not be eligible, either. Read more
This credit, which helps working families offset the cost of care for children under 13 and other dependents, would be significantly expanded for a single year. More people would be eligible, and many recipients would get a bigger break. The bill would also make the credit fully refundable, which means you could collect the money as a refund even if your tax bill was zero. “That will be helpful to people at the lower end” of the income scale, said Mark Luscombe, principal federal tax analyst at Wolters Kluwer Tax & Accounting. Read more.
There would be a big one for people who already have debt. You wouldn’t have to pay income taxes on forgiven debt if you qualify for loan forgiveness or cancellation — for example, if you’ve been in an income-driven repayment plan for the requisite number of years, if your school defrauded you or if Congress or the president wipes away $10,000 of debt for large numbers of people. This would be the case for debt forgiven between Jan. 1, 2021, and the end of 2025. Read more.
The bill would provide billions of dollars in rental and utility assistance to people who are struggling and in danger of being evicted from their homes. About $27 billion would go toward emergency rental assistance. The vast majority of it would replenish the so-called Coronavirus Relief Fund, created by the CARES Act and distributed through state, local and tribal governments, according to the National Low Income Housing Coalition. That’s on top of the $25 billion in assistance provided by the relief package passed in December. To receive financial assistance — which could be used for rent, utilities and other housing expenses — households would have to meet several conditions. Household income could not exceed 80 percent of the area median income, at least one household member must be at risk of homelessness or housing instability, and individuals would have to qualify for unemployment benefits or have experienced financial hardship (directly or indirectly) because of the pandemic. Assistance could be provided for up to 18 months, according to the National Low Income Housing Coalition. Lower-income families that have been unemployed for three months or more would be given priority for assistance. Read more.
But for now, petroleum stockpiles are dwindling around the world as energy demand begins to recover.
As always, tensions in the Middle East could determine what happens to oil prices.
In recent weeks drone attacks on energy facilities in Saudi Arabia sent shudders through oil markets. While Houthi rebels in Yemen claimed credit for the operation, the drones may well have been launched by Iran, which is allied with the rebels, according to Saudi security officials.
“The heating up of what’s commonly understood as a proxy war between Iran and Saudi Arabia in Yemen is just adding to the bullish oil price fever,” said Louise Dickson, a Rystad Energy oil markets analyst.
Iraqi militias believed to be allied with Iran have also attacked American military forces.
Some tensions in the region could ease if the Biden administration and Iranian officials restart negotiations on a new nuclear agreement to replace the one that was negotiated by the Obama administration and abandoned by the Trump administration. Iran would then most likely export more oil.
Of course, U.S. oil executives have little control over those geopolitical matters and say they are doing what they can to avoid another abrupt reversal.
“We’re not betting on higher prices to bail us out,” Michael Wirth, Chevron’s chief executive, told investors on Tuesday.
Chevron said this month that it would spend $14 billion to $16 billion a year on capital projects and exploration through 2025. That is several billion dollars less than the company spent in the years before the pandemic, as the company focuses on producing the lowest-cost barrels.
“So far, these guys are refusing to take the bait,” said Raoul LeBlanc, a vice president at IHS Markit, a research and consulting firm. But he added that the investment decisions of American executives could change if oil prices climb much higher. “It’s far, far too early to say that this discipline will last.”
