With President Joe Biden’s release of another 15 million barrels, the Strategic Petroleum Reserve will be drawn down to its lowest levels since 1984. The United States is vulnerable to another oil crisis. The data suggest that another energy crunch is coming in late 2023.
One challenge is that U.S. oil production, rather than increasing, as the Energy Information Administration had predicted, has plateaued. The weekly domestic oil production data from the EIA continue to show U.S. crude oil production at or around 12 million barrels a day. Since June 2022, production has flat-lined. U.S. production is running 400,000 barrels a day below the EIA’s projections of just six months ago. There is a risk that without a pivot by the Biden administration in its war against domestic fossil fuel energy, the U.S. shale revolution could be ending prematurely. And global oil markets are already supply-constrained. Existing spare capacity is largely controlled by Saudi Arabia, whose paranoid and prideful leader Biden has further alienated.
Because of the looming worldwide recession, the global oil supply-demand outlook is well-balanced for the next several months. But toward the fourth quarter of 2023, the global economy will begin to improve. Europe, the U.S., and China should begin to move in sync on a strong growth trajectory. Global growth will mean that demand for oil will also rise. The 1 million barrels of current global spare capacity will be absorbed. If U.S. shale producers don’t ride to the rescue, then $150 oil and $6.00 gasoline could emerge.
A PUNITIVE RESPONSE TO OPEC’S CUTS WILL LIKELY BACKFIRE
U.S. oil production has plateaued for several reasons. Investors want a return on their capital invested. From 2010 to 2021, the U.S. shale oil industry generated negative cash flows of $300 billion and impaired more than $450 billion of capital invested. Today, shale oil investors want profits, not losses. The Federal Reserve Bank of Dallas puts it succinctly, “Shale producers have kept a lid on supply amid pressure from shareholders to maintain capital discipline and use profits for dividend payments and buybacks rather than for pumping up production.” Shale oil producers are hesitant about new investment because oilfield services inflation is the highest in a decade or longer. As Wood Mackenzie observes, “Onshore, costs in the U.S. lower 48 [states] are expected to rise by 15-20% on average this year.”
But Biden shares significant blame for the situation.
Because of his ideologically motivated war on the domestic fossil fuel industry, shale oil producers hesitate to invest. Shale oil producers want to see how the political landscape shifts after the Nov. 8 midterm elections. In addition, by releasing evermore oil in an effort to lower gasoline prices, the Biden administration discourages new production. Producers become uncertain about the supply-demand outlook. Producers hesitate. Strategic Petroleum Reserve releases muddle the pricing signal. The Biden administration is discouraging capital investment. A nightmare scenario for the U.S. would be a complete pivot by Saudi Arabia toward Russia. If that were to occur and the Saudis dramatically reduced oil production, both the world economy and the U.S. economy would dip back into a deep recession.
Democrats are fooling themselves about a green energy revolution. Nimbyism, permitting delays, and supply shortages of critical metals all make a joke of the Biden administration’s goal to transform the U.S. economy from black carbon to bright green in seven years. The U.S. will need fossil fuels for decades. Higher prices for oil appear inevitable.
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James Rogan is a former foreign service officer who later worked in finance and law for 30 years. He writes a daily note on finance and the economy, politics, sociology, and criminal justice.
