Gas prices are high. Oil CEOs reveal why they’re not drilling more

On Mar 24, 2022

Fifty-nine percent of oil executives said investor pressure to maintain capital discipline is the primary reason publicly traded oil producers are restraining growth, according to a Federal Reserve Bank of Dallas survey released Wednesday.

For years, the boom-to-bust oil industry spent lavishly to fund all-out production growth. US oil output skyrocketed, keeping prices low. Yet sustaining profits proved elusive. Hundreds of oil companies went bankrupt during multiple oil price crashes, leading investors to demand more restraint from energy CEOs.

Today, oil companies are under enormous pressure from Wall Street to return cash to shareholders through dividends and buybacks, instead of investing in badly needed supply.

“Discipline continues to dominate the industry,” an executive from an oilfield services firm told the Dallas Fed in the survey. “Shareholders and lenders continue to demand a return on capital, and until it becomes unavoidably obvious that high energy prices will sustain, there will be no exploration spending.”

US output is down even as prices skyrocket

Although US oil supply is expected to rise in the coming months, it remains well below pre-Covid output. That’s despite the fact that oil prices have spiked to levels unseen since 2008.

The United States produced 11.6 million barrels per day in the week ending March 18, according to the US Energy Information Administration. That’s down 10% from late 2019.

Prices, on the other hand, have surged. US crude oil closed at $114.93 a barrel Wednesday, up 88% from the end of 2019.

Current prices are well above the $56 per barrel average that oil companies told the Dallas Fed they need to profitably drill. Larger companies said they need per barrel prices of just $49 to turn a profit.

Yet oil executives and investors don’t want to add so much supply that it causes another glut that crashes prices. And shareholders want companies to return excess profits in the form of dividends and buybacks, not reinvest them in increasing production.

One executive surveyed pointed to the staggering losses suffered by shareholders in recent years. The energy sector, comprised largely of oil-and-gas firms, was easily the worst performer last decade.

“Investors dumped huge funds into shale drilling only to discover that when oil prices dropped, very little value existed at the end of the day,” the executive said.

Only 6% blame government regulation

Following Russia’s invasion of Ukraine, the US price of regular gasoline hit a record high of $4.33 a gallon.

Although environmental policies are often blamed for high energy costs, oil executives do not seem to view them as the central factor here.

Just 6% of executives polled by the Dallas Fed pointed to government regulations as the primary reason publicly-traded oil companies are restraining production growth.

Another 11% pointed to environmental, social and governance (ESG) issues. The ESG movement has led many investors to shy away from fossil fuel companies in favor of clean energy ones.

About 15% of executives said “other” factors were to blame, including personnel shortages and supply-chain problems.

‘Vilification’ of the oil industry

Still, multiple executives…

Gas prices are high. Oil CEOs reveal why they’re not drilling more

US output is down even as prices skyrocket

Only 6% blame government regulation

‘Vilification’ of the oil industry

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