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Market Conundrum: With Oil Prices So High Why Is Exploration, Production So Low?

By Ellen R. Wald, Ph.D.CommoditiesFeb 17, 2022 06:00AM ET
www.investing.com/analysis/market-conundrum-with-oil-prices-so-high-why-is-exploration-production-so-low-200618167?fbclid=IwAR0maZsMr1M9sCRdch7Os0b6E023I8jbITooK8QPQQ2iuUT-3haSjwNv7RM
Market Conundrum: With Oil Prices So High Why Is Exploration, Production So Low?
By Ellen R. Wald, Ph.D.   |  Feb 17, 2022 06:00AM ET
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Oil prices are higher than they have been in more than seven years, which is generally a good sign for oil companies and the expansion of the industry. However, we are seeing a conundrum in this regard.

Crude Oil WTI Weekly Chart
Crude Oil WTI Weekly Chart

With oil prices up at these levels, there should be more and growing exploration and production (E&P), but that's not the case.

According to Amrita Sen of Energy Aspects, the industry needs "at least $520 billion in investment each year" just to keep global production at 100 million bpd. Yet, according to her analysis, the industry is only investing $370 billion.

Why aren’t we seeing more investment and what does this dearth of E&P mean for the market in the long term?

What's Holding Back Exploration & Production

In the U.S., production is 1.6 million bpd lower than it was in January 2020, even though prices are at least $35 per barrel higher and thus more enticing to producers.

The oil rig count is still around 500, compared to the nearly 700 oil rigs in operation pre-pandemic. This indicates that output is not growing all that much despite the potential for greater profit.

Indicators like the Dallas Fed Survey and others have told us that U.S. producers are particularly concerned about investing in production for a variety of reasons at the moment. Some of these reasons are unique to the U.S. situation, but others also impact those operating outside the U.S.

  1. Regulatory Uncertainty: Federal regulations governing oil and gas production are in flux, especially rules governing emissions, permitting, and leasing. Despite the potential for short-term profits, producers in the U.S. remain anxious about how government policies will impact any investments they make now, especially investments in longer term projects.
  2. Hesitancy From Financiers: Similarly, banks and investors are unsure of the future vis-à-vis government policy. Many large banks have also been subject to harassment from activists over big investments in oil and gas companies in recent years, and face pressure to divest from the industry as a whole. These pressures and uncertainty de-incentivize risk-taking in the oil and gas industry.
  3. Environmentalist Positions: With so much uncertainty, oil and gas producers are wary of drawing the ire of the environmentalist movement. This can be a force against any commitments to expand E&P. It is especially strong in European companies where government policies discourage oil and gas producers from engaging in new exploration and production. Many companies, like BP (NYSE:BP), continue to commit more money and investment to non-oil and gas projects even though oil prices are high and crude oil sales and refining remain their largest sources of revenue and profit.
  4. Share Prices: Oil companies are demonstrating a preference for short-term, high share prices. Since the price of oil began to drop in 2014, oil producers cut back on E&P due to low prices. They also cut investments in efforts to protect their own share prices. Now that oil prices are higher again, producers could reinvest the revenue in E&P (with the accounting benefits and tax breaks that provides), or they could use the profits to prop up their share prices via dividends and excellent earnings numbers. Much of the industry has chosen the latter, as it has become preoccupied with high share prices and dividends in the present and immediate future, at the expense of E&P. (This also is not particular to U.S. producers only.)

What Lack Of E&P Means For The Energy Market And Industry

For the market, muted production growth means less worry about oversupply in the near future. In fact, in the long term—years from now—we might see a significant supply shortage if producers don’t start investing more in E&P soon.

For the industry, restrained E&P means that the prices of most equities will be high as long as the price of oil is high, but many producers will suffer in upcoming years if they do not find a way to produce. In the years to come, those producers that have invested in E&P, or that can acquire assets ready for production, will have a huge advantage over those that were unprepared for the future.

Market Conundrum: With Oil Prices So High Why Is Exploration, Production So Low?
 

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Market Conundrum: With Oil Prices So High Why Is Exploration, Production So Low?

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Comments (10)
andrew cando
andrew cando Feb 26, 2022 2:58AM ET
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because of ESG.
Roger Miller
Roger Miller Feb 20, 2022 2:24PM ET
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Your article makes it clear how governments are a big cause of higher oil prices and therefore inflation. The politicians that have people believe we can go green without higher oil and gas prices are being deceptive.
Saroop Calvete
Saroop Calvete Feb 17, 2022 10:38AM ET
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Because energy producers fear that the Brandon misadministration will shut them down and will lose the investment in exploration.
Gail Goodman
Gail Goodman Feb 17, 2022 10:38AM ET
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True, and all the while begging OPEC to pump more oil.
Bhuv Ar
Bhuv Ar Feb 17, 2022 10:11AM ET
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Because Gulf/OPEC+ nations see Biden as a weak individual with no conviction to increase oil production in US and make it Energy independent. So they are exploiting it. How is this even hard to understand?
andrew cando
andrew cando Feb 17, 2022 10:11AM ET
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The whole wide world see biden as a buffoon weak leader.
Charles Sturrock
Charles Sturrock Feb 17, 2022 9:34AM ET
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"Market Conundrum: With Oil Prices So High Why Is Exploration, Production So Low?" I can answer that question. Exploration and production are so low to keep oil prices at those high levels. Why work harder, when you can work less and make the same amount or more money?
MuraliKrishna Brahmandam
MuraliKrishna Brahmandam Feb 17, 2022 8:46AM ET
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Oil is caught between Jerome Bubble and Jerome Powell and PMUBTSIN
Jeff Page
Jeff Page Feb 17, 2022 8:27AM ET
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Directly adding to inflation, harming the poor, the disabled and the elderly on fixed income. I love people that find virtue in stepping over the homeless to save a puppy. Great read! Thank you! Please understand my disgust with "environmentalist", they have everything but, a plan.
JJ GG
UpDownUpDown Feb 17, 2022 8:27AM ET
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he says as he drinks his clean water, breathes his clean air, after a vacation in the national parks, goes fishing in a lake that's not dead.....
simone scelsa
simone scelsa Feb 17, 2022 8:27AM ET
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JJ GG  all of the above have nothing to do with the environmentalists
Ok Crude
Ok Crude Feb 17, 2022 8:17AM ET
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Jabber jabber Prices are up in oil patch worse than 20% You can't get spare engine and downhole spare parts to repair downhill. Sorry mam you NOT of what u preach
Jeff Jacobsen
Jeff Jacobsen Feb 17, 2022 8:11AM ET
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It's obvious your PhD is not in economics. Simple supply and demand dictates price action. Prices go up, more folks wants to get in, which means more production, driving price down. However, when you have a regulatory agency that is hostile, folks are hesitant to invest, keeping production low and prices high.
Gail Goodman
Gail Goodman Feb 17, 2022 8:11AM ET
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That's what she just said Jeff.  Re-read and look at #1 this time. I would turn it around on you and say it's obvious your strength is not reading comprehension.
Mohd Izhar Muslim
Mohd Izhar Muslim Feb 17, 2022 6:41AM ET
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lovely, thanks for the article 👍
 
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