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WHAT IT WOULD TAKE TO GET ENERGY COMPANIES TO EXPAND PRODUCTION: Oil prices have been above $120 per barrel for consecutive days, prompt month natural gas futures have been trading above $8 per MMBtu for weeks, and Treasury Secretary Janet Yellen’s two cents are that gasoline prices aren’t going to fall “anytime soon.”
For a number of independent producers, the run-up in prices hasn’t been enough to tempt them to spend on increasing production. Will the sum of it now be enough?
Capital discipline: Producers have been publicly beating the “capital discipline” drum for months, preferring to put healthy earnings toward buying back stock, returning cash to shareholders, and paying down debts, rather than racing to increase production and risk overexposing themselves if prices drop considerably.
While industry executives have named inflation, labor shortages, and difficulties accessing capital as factors contributing to their conservative spending strategies, large independents have drawn up differing risk calculations related to the war and demand than some of their integrated competitors, including Chevron and ExxonMobil, which have announced plans to increase production.
“We do not feel that today is the appropriate time to begin spending dollars that would not equate to additional barrels until multiple quarters from today given the uncertainty and volatility currently in the market,” Diamondback Energy said in its first-quarter earnings announcement, which was made public on May 2.
Increasing spending activity today “would result in capital efficiency degradation and would not meaningfully contribute to the global supply and demand imbalance in the oil market today,” the company said.
Others, including Devon Energy and Occidental Petroleum, have made similar overtures and declined to increase production targets.
War as a constant: Even if the war were to end in short order, its consequences for the oil and natural gas markets are to remain due to already-imposed and planned embargoes of Russian petroleum, and due to Europe’s intentions to displace Russian pipeline gas with LNG imports from the U.S. and other friends.
The Energy Information Administration forecasts Russia’s liquids fuel production to fall by around 2 million barrels per day in the fourth quarter of the year, compared to the first quarter.
The pressure is on: The industry is, and has been since the war started, under pressure already from President Joe Biden and Democrats in Congress to get their production levels up, as they’re accused of exploiting the war’s effect on oil prices to get richer.
To be sure, not all companies are all taking the exact same course. Biden singled out Exxon on Friday and urged the company to “start investing” to increase production.
An Exxon spokesperson stressed in response that the company plans to increase production by 25% this year in the Permian Basin, telling Jeremy the company has “been in regular contact with the administration, informing them of our planned investments to increase production and expand refining capacity in the United States.”
Chevron is also planning to increase production this year and committed to increase capital spending by over 60% compared to 2021, chairman and CEO Mike Wirth told the House Energy and Commerce Committee’s Subcommittee on Oversight in April.
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HOUSE DEMOCRATS PROBE ROLE OF PR FIRMS IN FOSSIL FUEL CAMPAIGNS: Two House Democrats have issued requests for five PR firms, as well as the American Petroleum Institute, to turn over documents detailing their work for major oil and gas companies, as part of an ongoing probe to determine whether these groups helped downplay the role of fossil fuels in climate change.
The letters were sent by House Natural Resources Committee Chairman Raul Grijalva of Arizona and Katie Porter of California to API, as well as the groups Blue Advertising, DDC Public Affairs, FTI Consulting, Singer Associates, and Story Partners.
Porter, the chairwoman of the House Natural Resources Oversight and Investigations Subcommittee, said that “fossil fuel companies have been lying to the public for decades to cover up the damage they’re doing to the planet and our long-term economic wellbeing.”
“At a time of record inflation and rising energy costs, we need solutions to unlock more American energy to keep the lights on and meet demand while reducing US emissions,” API senior vice president Megan Bloomgren said in a statement. “Any suggestion to the contrary is false. American energy is produced safer, more reliably, and to among the highest environmental standards in the world.”
CHINA OVERTAKES GERMANY AS LARGEST IMPORTER OF RUSSIAN ENERGY: Since the start of the war in Ukraine, China has overtaken Germany to become the top buyer of Russian energy, according to a new report from the Centre for Research on Energy and Clean Air.
Though Germany remains deeply dependent on Russian energy supplies—namely, on natural gas—it managed to cut its Russian imports by a modest 8% in May, researchers at the Helsinki-based center found. This is in keeping with broader EU trends, which come as the bloc moves to cut its dependence on Russian imports and secure alternative energy supplies.
Imports to China remained constant, however, allowing it to overtake Germany as the number-one buyer. Beijing imported roughly 12.6 billion euros of Russian energy supplies, the group found. India has also become a significant importer, purchasing 18% of Russian exports.
Fossil fuels are filling the Kremlin’s war chest: Despite the EU’s efforts to punish Moscow by shunning its energy supplies, heightened demand and a global scramble for fossil fuels has created something of a windfall for Moscow in the short-term. As the report noted, Russia’s average export prices were an average 60% higher than last year, even if they were discounted from international prices.
BRITS INVESTIGATING HIGH FUEL PRICES: The British government’s competition authority will investigate the national retail fuel market to provide an answer as to why fuel prices rise quickly but fall slowly.
Business Secretary Kwasi Kwarteng requested the investigation over the weekend, and Competition and Markets Authority head Andrea Coscelli confirmed in a letter today that the agency would carry out a review and advise the government on what it can do in response.
Kwarteng, who in May wrote to the United Kingdom’s leading energy trade associations asking them to ensure that drivers are getting a “fair deal” on fuel prices, announced his request to the CMA yesterday on Twitter.
“Fuel prices are always quick to go up but slow to come down – let’s see why,” he said.
Congressional Democrats have similarly drawn attention to the spread between retail fuel prices and crude oil to make the case that energy companies are gouging drivers, while industry players point to the “rocket and feather” effect to describe why fuel is quick to rise and slow to fall.
MEANWHILE, IN US, GAS PRICES PASS $5 MILESTONE: Gas prices in the U.S. passed a national average of $5 per gallon for the first time ever this weekend, according to AAA—a new and painful price point that analysts expect to climb even higher this summer.
Gas prices in the U.S. reached $5.01 per gallon, up 58 cents since May, and $1.94 compared to the same point last year. JPMorgan Chase analysts predicted gas prices will climb to roughly $6 per gallon this summer, a spike it attributed to unresolved supply chain issues and high travel demand.
When inflation is considered, however, the new numbers fall short of the all-time record seen in July 2008—then when prices peaked at $4.11 a gallon, or today’s equivalent of $5.40 a gallon.
SENATE BILL MEANT TO HELP VETS EXPOSED TO TOXIC CHEMICALS: Senators are slated to pass a sweeping bill this week to expand health care and disability benefits for U.S. veterans who were exposed to toxic chemicals. The bipartisan effort has been hailed as a “major achievement” for veterans, including many who served after 9/11 and were exposed to burn pits and other toxins.
The legislation, crafted by Senate Veterans’ Affairs Chairman Jon Tester, a Montana Democrat, and ranking member Jerry Moran, a Kansas Republican, would expand benefits for roughly 3.5 million veterans.
House lawmakers approved a version of the bill, 256-174, earlier this year. The amended Senate version is all but certain to clear both chambers, and Biden has also vowed to approve it when it reached his desk—telling reporters last month he would “sign it immediately.”
Under the bill, the VA would add 23 new illnesses and conditions related to burn pit and toxic exposure—ranging from brain cancer to hypertension—to its list of “automatic qualifiers” for VA healthcare benefits and disability checks. Read more about the legislation here.
CONSERVATIVE YOUTH CLIMATE GROUP CONCLUDES INAUGURAL SUMMIT: The American Conservation Coalition hosted more than 200 young conservative activists in D.C. over the weekend as part of its first-ever summit to talk over conservative solutions for dealing with climate change.
The three-day event featured Republican House Western Caucus member Reps. Dan Newhouse and Bruce Westerman, Rep. Dan Crenshaw, and former Transportation Secretary Elaine Chao.
See ACC’s summary video here.
The Rundown
Bloomberg How the ‘energy shock’ has upended the global economy
Reuters Global nuclear arsenal to grow for first time since Cold War, think-tank says
Wall Street Journal Mexico takes aim at private companies, threatening decades of economic growth
Reuters Striking South Korean truckers say they may block coal to power plant
Calendar
THURSDAY | JUNE 16
3 p.m. 1201 Pennsylvania Ave. Citizens for Responsible Energy Solutions (CRES) will hold a forum examining the SEC climate disclosure rule and role of U.S. plastics in global climate mitigation. A networking reception will follow. Find out more and register here.
