As Covid-19 swept the world, America’s shale industry was brought to its knees. An unprecedented slump in demand drove the country’s oil price below zero for the first time on record. Dozens of operators filed for bankruptcy protection. [bold, links added]
What followed was a steep, protracted road to recovery — and then Russia invaded Ukraine. Now that the conflict has driven the price of crude to its highest levels since 2008, producers who only two years ago had been pushed to the brink are back on the march.
According to John Kilduff, partner at Again Capital, an investment firm, the “boom times” are about to return for those producers.
Oil’s rapid ascent is “just too much of an allure not to capitalize on. I don’t think that it’s unfair to say, if these prices last even much longer, that there will be a gold rush.”
A ban on Russian oil in the United States and Britain’s commitment to phase out all imports this year have intensified supply fears that were already fuelling an extraordinary rally.
Last week, West Texas Intermediate, the American benchmark oil price that stooped as low as minus $40 in April 2020, hit $129.
President Biden, who faces a crucial set of midterm congressional elections in eight months, is trying to persuade Americans that “Putin’s price hike” is the reason they are digging deeper than ever before to fill up their cars.
He knows that blame is rarely apportioned far from the Oval Office when voters are feeling the pinch at the pump.
Jennifer Granholm, the US energy secretary, made a stark appeal to oil executives gathered in Houston, Texas, last Wednesday.
“We are on a war footing,” she declared at the CERAWeek conference. “That means releases from the strategic reserves across the world, as we have done. That means you producing more right now, where and if you can.”
The last shale boom carried America’s oil output to a peak of 12.9 million barrels per day before the pandemic. Covid suppressed production to less than 11 million barrels, but this has since recovered to 11.7 million.
The Baker Hughes rig count, a key barometer of activity across America’s oil sector, reported that 663 rigs were in operation as of Friday, up 261 on the same point in 2021.
Until recently, few industry experts believed that US oil production would ever return to its pre-coronavirus levels.
“Even last year, the majority of large producers were saying that we would never see pre-Covid [output] records in future,” Artem Abramov, head of shale research at Rystad Energy, a consultancy, said.
As it stands, though, records that a matter of months ago seemed untouchable could be toppled this year. Rystad, which already had forecast growth of 900,000 barrels per day in American output in 2022, is now predicting a further increase of up to 600,000.
Oil production is not the only thing on the rise. Shares in America’s top shale operators, which tumbled two years ago, rose sharply as Putin’s forces prepared to invade Ukraine.
ConocoPhillips’ stock has climbed by more than a third since the start of this year, while shares in Chesapeake Energy and Continental Resources are up by a fifth.
Some producers, given their struggles of the recent past, are understandably wary of stepping up production beyond their previous plans.
Persisting labor shortages and supply constraints abound. Demand remains variable. Above all, drilling and fracking — or hydraulic fracturing, the process by which a mix of water, sand, and chemicals is injected into the ground under high pressure, breaking up shale rock and releasing the gas held within — are expensive.
Long before the pandemic, Wall Street was demanding spending cuts and greater returns.
Grappling with record petrol prices across the US, the White House is impatient.
Yet so far Biden, on a mission to decarbonize the world’s largest economy by 2050, has shown little interest in building bridges with its oil industry.
The president bluntly dismissed suggestions that his policies were holding back domestic production as “simply not true” during a live television address last Tuesday.
Calls from the sector for greater support have fallen on deaf ears. Operators already have about 9,100 unused permits to drill on federal land, Biden noted, arguing that they “could be drilling right now, yesterday, last week, last year” but had decided not to.
Granholm went further, accusing lobbyists of peddling “the same old DC BS” during an emergency. She asked: “Aren’t we ready to finally work together to confront this moment of crisis?”
Some executives have expressed apprehension that Washington’s appetite for oil could be short-lived.
“The rhetoric from the administration is we need more oil now, but we don’t need it later,” Mike Sommers, chief executive of the American Petroleum Institute, told Axios. How could companies make long-term investments, he mused, when they did not know what policies to expect in the future?
Biden, meanwhile, is standing by his climate agenda and a goal of transitioning away from fossil fuels.
His officials insist that there is no tension between the desire for more domestic oil and gas output today and alternative sources tomorrow. They are trying, as Granholm put it, to “walk and chew gum at the same time.”
With US inflation at a four-decade high, Biden has vowed to throw all he can at mitigating the cost of surging oil prices for consumers.
“This is not a ‘drill, baby, drill,’ administration, that’s for sure,” Kilduff said. It is, nevertheless, one that faces the ballot box in November.
Officials would “bite the bullet”, he predicted, and do everything possible “in the short term” to boost oil production and get prices down.
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