- Oil price volatility has spiked since Russia invaded Ukraine, highlighting how the world relies on oil and gas and how supply disruptions can lead to economic disaster.
- While Biden has called on the U.S. oil industry to produce more oil, a combination of regulations and underinvestment means the U.S. industry can’t produce much more oil in the short term.
- The message from this week’s CERAWeek conference was clear, the U.S. needs to treat its oil and gas like an asset rather than a liability and invest in long-term energy security.
Russia’s invasion of Ukraine has caused some of the most volatile days in the history of oil markets and that volatility isn’t going anywhere. The war in Ukraine has also shown, once again, that the world very much depends on oil and gas and any major disruption (or a threat thereof) would threaten global energy supplies and the energy security of Europe and the United States.
The U.S. Administration has finally realized that it needs to turn to its very own American oil producers for more supply, instead of months of pleading with OPEC+ led by Saudi Arabia and Russia. The calls from the Administration for more U.S. oil and gas production—right now, but only in the short term, please—have intensified since Russia invaded Ukraine.
But the industry, neglected for over a year by the Biden Administration and demonized worldwide for exacerbating climate change, has this to say to all those pleading for more oil production: We cannot because of the time lag between drilling and first oil, also because of years of underinvestment, capital discipline, discouraging federal policies toward the oil industry, and supply chain bottlenecks.
The oil sector needs more investment and this could be a fix - in the longer term - to major supply shocks, Exxon’s chief executive Darren Woods and other oil industry executives said at the CERAWeek by S&P Global energy conference in Houston this week.
The war in Ukraine and the resultant mayhem in global energy and oil markets underscored the global nature of oil supply and trade, and the insufficient investment in oil and gas in recent years, which is now evident in the fact that there cannot be a major boost to production from U.S. shale and the international oil majors.
At the same time, demand is rebounding from the pandemic slump and the world needs more oil, which cannot be supplied tomorrow - or even in months from now - by U.S. shale, even if all company executives were to ask their boards and investors to approve limitless drilling budgets today.
'We’ll Have To Live With Volatility'
Even before Putin invaded Ukraine, the world’s dependence on oil and the rising demand had tightened the market, which was one Libya outage away from price spikes and supply deficits. Now that a large volume of Russian seaborne supply - roughly three times Libya’s daily output - is struggling to find buyers amid sanctions and “self-sanctioning” from traders and oil majors, volatility in prices naturally skyrocketed.
U.S. officials admitted as much at the Houston conference.
“The volatility of price, and with supply and demand, is something we’re going to live with for a little while here in the midst of this,” Special Presidential Envoy for Climate John Kerry said at CERAWeek as carried by The Wall Street Journal.
Nothing screams more volatility than the $30 per barrel jump in oil prices since Putin invaded Ukraine two weeks ago, and the crash on Wednesday, which saw Brent crude dropping by $15 a barrel after the UAE signaled it would support higher production levels from the OPEC+ group. There are also Russian threats dropping here and there of either stopping Nord Stream 1 gas flows to Germany, or “Russia may be forced to rethink its energy-supply commitments,” as Kremlin spokesman Dmitry Peskov said on Wednesday.
Biden Administration Changes Tune To Domestic Oil Industry
Faced with the highest gasoline prices since 2008, the Biden Administration is asking U.S. oil producers to open the taps. But only in the short term, because the long-term priority remains clean energy and a move away from fossil fuels. Production increases “now” and “in the short term” featured in both the White House’s announcement of a ban on Russian energy imports and in the speech of Secretary of Energy Jennifer Granholm at CERAWeek.
“We are on a war footing - an emergency - and we have to responsibly increase short-term supply where we can right now to stabilize the market and to minimize harm to American families,” Granholm said.
“So yes, right now, we need oil and gas production to rise to meet current demand,” the energy secretary said, focusing on the energy transition, while asking U.S. oil producers to pump more oil NOW.
U.S. Shale Doesn’t Want Short-Term Fixes
However, the U.S. oil industry cannot boost supply right now.
Even if ConocoPhillips decided to pump more oil today, the first drop of new oil would come within eight to 12 months, CEO Ryan Lance told CNBC on Tuesday.
Despite its flexibility to respond to soaring oil prices, the U.S. shale patch cannot come to the rescue of the increasingly tightening oil market in the short term, commodity intelligence firm Kpler said earlier this week.
While the U.S. shale patch made it clear that it cannot boost production right now, it suggested that the federal government should stop its anti-oil policies and support American energy in the long term, so as to free the United States from dependence on Russia and other foreign adversaries, including currently-sanctioned Venezuela and Iran.
Since the Biden Administration started shunning U.S. oil - which was on President Biden’s first day in office when he axed the Keystone XL pipeline project for more oil from U.S. ally Canada - the oil industry has repeatedly warned that constraining American oil and gas production would undermine energy security.
This became painfully evident after Putin invaded Ukraine, prompting calls from the industry for long-term support for American energy.
“Approve The Permits,” the US Oil & Gas Association said this week.
In response to White House comments that companies are not tapping “9,000 approved oil leases,” the Western Energy Alliance said last week “The Biden Administration has embarked on an agenda of regulatory overreach with extensive new regulations in the works. The uncertainty of all the new red tape puts a damper on new investment and development today, especially on federal lands where the burden is highest. Consequently, companies prioritize their nonfederal leases because there’s less regulatory risk.”
Todd Staples, president of the Texas Oil & Gas Association, said on Tuesday:
“The administration calling on foreign countries to increase production a few months ago, rather than encouraging local jobs and local investment, had a chilling effect on expansion.”
“This crisis should be a wakeup call that we need strategic American energy policy that treats oil and natural gas as an asset and not a liability. The suffering of consumers at the pump underscores the importance of domestic energy production, and American consumers are feeling the repercussions of canceled pipeline projects, delayed approvals for permits and the discouragement of additional expansion, poor decisions all exacerbated by the war,” Staples said.