Back in the more innocent days of 2010, we had Sarah Palin – “Drill, baby, drill” (more innocent because folk were just circulating doctored photos of President Obama, instead of threatening to kill elected officials). Now, we have a new chorus of people asserting that allowing more permitting would relieve gasoline price pressures. Well, from the Dallas Fed (courtesy of Bruce Hall), some text in plain English.
Oil Producers Face Difficulties Increasing Production
Consumers and policymakers often ask what domestic oil producers can do to raise output and lower gasoline prices, especially since producers’ profitability has greatly improved in 2022. Because the price of crude oil is determined in global markets, increases in domestic oil production affect the retail price of gasoline only to the extent that they lower global oil prices.
Many observers point out that oil companies currently hold nearly 9,000 permits to drill on federal lands. But holding 9,000 permits does not equate to 9,000 well locations that are worth drilling, nor would it be possible to churn through that much inventory in a reasonable time frame.
Data provider Enersection found that since 2015, an average of 1,560 wells have been drilled on federal lands annually, but only 47 percent of federal permits issued were actually utilized. This is because companies tend to acquire permits on the acreage they lease even if they are not certain whether the location is worth developing.
The latest Dallas Fed Energy Survey shows that investor pressure to maintain capital discipline—which precludes higher investment in expanding oil production—is the primary restraint on publicly traded companies. This is not simply a case of investors being selfish, but of investors who suffered persistent losses in years past wanting compensation for the risk they take. Depriving these investors of the returns they insist on, by whatever means, would likely be counterproductive because without these investors, the industry would lack the capital to maintain—never mind, increase—crude production going forward.
Additionally, producers and service companies are constrained by labor shortages, rising input costs and supply-chain bottlenecks for vital equipment such as well casing and coiled tubing. An industry that lacks experienced staff and materials cannot on short notice substantially increase drilling and production.
Complicating matters, many shale producers are running low on top-quality drilling locations. Thus, it would be unreasonable to expect a noticeable increase in oil production before 2023 at the earliest, even if investors were to agree to higher production targets.
Higher U.S. Oil Production Might Not Lower Retail Gasoline Prices
Apart from the difficulties of expanding domestic oil production, what are the odds of higher U.S. oil production growth materially lowering the prices of crude oil and gasoline?
Even under the most optimistic view, U.S. production increases would likely add only a few hundred thousand barrels per day above current forecasts. This amounts to a proverbial drop in the bucket in the 100-million-barrel-per-day global oil market, especially relative to a looming reduction in Russian oil exports due to war-related sanctions that could easily reach 3 million barrels per day.
Placing the responsibility to lower retail gasoline prices on shale oil producers is thus unlikely to work, and additional regulation of oil producers is unlikely to lower pump prices.
There must be a term for people who cite articles that counter their main point, but I’m not sure what it is.
In any case, this sort of logic has been clear for a long time. It turns out in 2008, I noted the fallacy of drilling to drive down oil prices. Believe it or not, Bruce Hall weighed in then as well.