From Ed Yardeni on oil:
(1) Production is slowly rising. Oil industry executives may talk a lot about going green; but the reality is that when the price of oil is high, they pump more, and when the price of oil is low, they pump less. From June 20, 2014 through February 11, 2016, the price of oil fell from $107.95 a barrel to a low of $26.21 a barrel; after an adjustment period, domestic crude oil production responded by declining from a peak of 9.6 million barrels per day (mbd) in June 2014 to a low of 8.4 mbd in mid-2016 ( Fig. 1 and Fig. 2).
Over the next four years, oil prices recovered, and production did too. The fracking miracle sent US production up to 13.1 mbd in February 2020. The onset of Covid sent the price of a barrel of West Texas Intermediate crude oil briefly below zero to minus $37.00 on April 20, 2020 (the first and only negative reading) as storage capacity filled up. Again, the oil industry responded as you’d expect: Production fell to a low of 9.7 mbd in February 2021. And now that oil prices are north of $100 a barrel, US production is rising once again. It hit 11.9 mbd as of the week of June 3. The number of oil drilling rigs, which fell to a low of 172 in August 2020, has gradually increased to a recent 574 ( Fig. 3).
US producers have slowly been spending more. In Q1, $94.4 billion (saar) was spent on mining exploration, shafts, and well structures, according to GDP data. That’s a sharp rebound from $57.9 billion during Q3-2020 but far below the recent peak of $173.1 billion during Q4-2014 ( Fig. 4).
Companies have plenty of cash to spend on boosting production; they’ve just been spending it elsewhere. Last year, 119 publicly traded exploration and production companies around the world spent 1% more on exploration and development in 2021 than in 2020, according to a June 2 report from the Energy Information Administration (EIA). Instead of increasing exploration and development sharply, they opted to reduce their net debt by $134 billion, the largest amount in any year since 2012. And dividends increased to $107 billion, 24% above the average paid out from 2015 to 2019.
(2) Talking with Venezuela and Iran. President Biden has taken a number of steps to increase the amount of oil in the market but with little success so far. For example, Biden has tried to open talks with Iran and Venezuela, two countries that have spare capacity but are prevented from exporting to the US because of sanctions.
Venezuela has the world’s largest petroleum reserves, but its state-owned oil company, PDVSA, has been crippled by mismanagement. The country has also suffered under US sanctions put in place in 2019 after the US accused President Nicolas Maduro of election fraud. The sanctions forced American oil companies to stop drilling in the country and scared away bankers and customers, according to an October 7, 2020 NYT article.
The two nations’ last round of talks, scheduled for October, was scrapped after the US took into custody a Venezuela-based businessman who helped the government bypass sanctions. But the Biden administration may be trying to soften relations. After administration officials visited Caracas in March, two American prisoners were released, leaving eight still imprisoned in the country.
In May, the Biden administration said it would permit discussions between the Maduro government and Chevron about the possibility of future work if the government returns to negotiations with the opposition in hopes of having a free and fair election in 2024. In addition, sanctions on Carlos Eric Malpica, a former Venezuelan state oil official and nephew of the First Lady, were lifted, according to a Venezuelan opposition official cited in a May 17 NYT article. That said, Venezuela, Nicaragua, and Cuba were excluded from the US-hosted Summit of the Americas this week.
President Biden has also hoped to reenter the 2015 nuclear agreement with Iran, but he’s been unwilling to remove Iran’s Islamic Revolutionary Guards Corps from the US foreign terrorist organization list. Iran wants the guards off the list before it complies with the nuclear deal. The US withdrew from the nuclear deal in May 2018 when the Trump administration imposed sanctions, aimed at weakening Iran’s Islamist regime, that barred dealing with the country, including its oil industry.
(3) Saudis: Pariahs no more. As a presidential candidate, Biden said he would make Saudi Arabia a pariah nation and punish the country for the role that Saudi Crown Prince Mohammed bin Salman played in the 2019 murder of journalist Jamal Khashoggi. But as president and with oil selling north of $100 a barrel, Biden has taken a more conciliatory approach: He plans to meet with Saudi Arabian and other Middle Eastern oil-producing countries’ leaders later this month, presumably to talk oil and weapons. The Saudis want more equipment, including the Patriot anti-missile systems and new security guarantees.
The Biden administration has been successful at pressuring the Saudis to increase production. OPEC+ recently announced plans to produce at a rate of 650,000 barrels a day in July and August instead of September as previously planned. But that didn’t stop the price of oil from heading higher in the face of expected drops in Russian oil production, hobbled by sanctions. Russia’s production could fall by up to 3mbd later this year, estimates the International Energy Agency... |
