Oil and gas prices could remain high as investors look for clean energy

HOUSTON Americans are spending a dollar more for a gallon of gas than they were a year ago. Natural gas prices have risen more than 150 percent in the same time, putting the prices of food, chemicals, plastic goods and heat at risk of soaring this winter.

The energy system is suddenly in crisis around the world as the costs of oil, natural gas and coal have soared in recent months. In China, Britain and elsewhere, fuel shortages and panic buying have led to power outages and long lines at petrol stations.

The situation in the United States is not so dire, but oil and gasoline prices are high enough that President Biden has called on foreign producers to boost supply. He does this while simultaneously urging Congress to address climate change by moving the country away from fossil fuels to renewable energy and electric cars.

US energy managers and the Wall Street bankers and investors who fund them are doing nothing to ramp up production to levels that could drive prices down. The top oil price in the US rose nearly 3 percent on Monday to about $78 a barrel, its highest point in seven years.

Producers are still annoyed by the memories of the price crash at the beginning of the pandemic. Wall Street is even less enthusiastic. Not only have banks and investors lost money in the boom-bust cycles that have whipped the industry over the past decade, but many say they are willing to reduce their exposure to fossil fuels to meet the commitments they have made. done to combat climate change.

Everyone has been very wary since it was just 15 or 16 months since we had negative oil prices of $30 a barrel, said Kirk Edwards, president of Latigo Petroleum, which has interests in 2,000 oil and natural gas wells in Texas and Oklahoma. He recalled a time of so little demand and storage capacity that some traders paid buyers to take oil off their hands.

If the drillers don’t increase production, fuel prices can remain high and even rise. That would pose a political problem for Mr Biden. Many Americans, especially lower-income families, are vulnerable to wide swings in oil and gas prices. And while the use of renewable energy and electric cars is increasing, it remains too small to meaningfully offset the pain of higher gasoline and natural gas prices.

Goldman Sachs analysts say energy supplies could tighten further, potentially pushing oil prices up $10 before the end of the year.

That helps explain why the Biden administration has put pressure on the Organization of the Petroleum Exporting Countries to increase supply. We continue to talk with international partners, including OPEC, about the importance of competitive markets and pricing and doing more to support the recovery, Mr Bidens’ press secretary Jen Psaki said last week.

But OPEC and its allies declined on Monday to significantly increase the offer, reaffirming existing plans for a modest hike in November. They are reluctant to produce more for the same reasons that many US oil and gas companies do not want to.

Oil executives argue that while prices seem high, there is no guarantee they will remain high, especially as the global economy weakens as coronavirus cases begin to pick up again. Since the start of the pandemic, the oil industry has laid off tens of thousands of workers and dozens of companies have gone bankrupt or in debt.

Oil prices may seem high relative to 2020, but they are not stratospheric, executives said. Prices were in the same area in mid-2018 and are still a long way from the $100 a barrel level they had reached in 2014.

Largely because of industry prudence, the nationwide number of oil rigs producing oil is 528, about half of its 2019 peak. But barring recent production interruptions in the Gulf of Mexico from Hurricane Ida, U.S. oil production has nearly recovered. to prepandemic days, as companies extract crude oil from wells they drilled years ago.

Another reason for the decline in drilling is that banks and investors are reluctant to put more money into the oil and gas industry. Wall Street’s capital flow has slowed to a trickle after a decade in which investors poured more than $1.4 trillion into North American oil and gas producers through stock and bond issues and loans, according to research firm Dealogic.

The banks have pulled out of funding, said Scott Sheffield, chief executive of Pioneer Natural Resources, a major Texas oil and gas producer.

The flow of money from banks and other investors had slowed even before the pandemic as shale resources often produced a lot of oil and gas at first, but soon became depleted. Many oil producers made little or no profit, leading to bankruptcies as energy prices fell.

Companies were constantly selling shares or borrowing money to drill new wells. Pioneer, for example, did not generate cash as a company between 2008 and 2020. Instead, it used $3.8 billion to run its business and make capital investments, according to the company’s financial statements.

Corporate leaders have come to preach financial conservatism and tell shareholders that they are going to raise dividends and buy back more stock, not borrow for major expansion. Mr Sheffield said Pioneer now plans to return 80 percent of its free cash flow, a measure of the money generated from operations, to shareholders. The model has completely changed, he said.

Oil company shares have soared this year after years of declines. Still, investors remain reluctant to fund a major production expansion.

With oil and gas exploration and production companies taking a cautious approach and returning money to shareholders, the first E&P to deviate from that strategy will be vilified by public investors, said Ben Dell, president of Kimmeridge, an energy-focused private equity firm. . No one goes down that road quickly.

This aversion to expanding oil and gas production is partly driven by investors’ growing enthusiasm for renewable energy. Equity funds focused on investments such as wind and solar manage $1.3 trillion in assets, up 40 percent this year, according to RBC Capital.

And the largest investment companies require companies to reduce emissions from their operations and products, which is much more difficult for oil and gas companies than it is for technology companies or other companies in the service sector.

BlackRock, the world’s largest asset manager, wants the companies it invests in to ultimately remove as much carbon dioxide from the environment as they emit, known as net zero emissions. The New York State Common Retirement Fund, which manages the retirement funds of state and local government workers, said it stops investing in companies that take insufficient steps to reduce CO2 emissions.

But even some investors pushing for emissions cuts are expressing concern that the transition from fossil fuels could push energy prices up too quickly.

Mr Dell said limited supplies of oil and natural gas and the cost of investing in renewable energy and battery storage for when the sun isn’t shining and the wind isn’t blowing could drive energy prices up for the foreseeable future. I’m confident you’ll see a period of rising energy prices this decade, he said.

Laurence D. Fink, chairman and chief executive of BlackRock, said this could undermine political support for moving away from fossil fuels.

We risk a supply crisis that drives up costs for consumers, especially those who can least afford it, and risks making the transition politically unsustainable, he said in a speech in July.

There are already signs of stress all over the world. Europe and Asia have a shortage of natural gas, causing prices to rise before the first winter cold. Russia, a major gas supplier to both regions, has delivered less gas than its customers expected, making it difficult for some countries to replace nuclear and coal-fired power stations with gas-fired power plants.

OPEC, Russia and others have been careful not to increase oil production for fear that prices could fall if they flood the market. Saudi Arabia, the United Arab Emirates, Russia and some other producers have about eight million barrels of spare capacity.

The market has no structural shortage of oil, said Bjornar Tonhaugen, head of oil markets for Rystad Energy, a Norwegian energy consultancy.

Helima Croft, head of global commodities strategy at RBC Capital Markets, said she expected OPEC and Russia would be willing to increase production if they saw the supply-demand balance tighten from here.

If OPEC increases production, US producers like Mr. Edwards of Latigo Petroleum will be even more reluctant to drill. So far, he has stuck to the investment plans he made at the start of the year to drill just eight new wells in the past eight months.

Just because prices have risen for a month or two doesn’t mean there will be a rush of oil rigs, he said. The industry is always going up and down.

Clifford Krauss reported from Houston, and Peter Eavis from New York.