The long-suffering Americans who struggled with runaway inflation finally got some probation. According to the American Automobile Association, after a relentless rise, gas station prices have been heading south, and the national average gasoline price has fallen to a 10-week low of $3.28 per gallon. After President Joe Biden announced the release of the largest strategic oil reserve in history on November 23, fuel prices began to stabilize, although experts believed that this was just a band-aid. Although many people blame the Biden administration for high oil prices, the real culprit is more related to Wall Street than Pennsylvania Avenue.

The origins of today’s high oil prices can be traced back to the financial pressures caused by oil companies’ devastating losses and poor shareholder returns for a decade, which forced them to drastically change their business models. For many years, after the hydraulic fracturing revolution caused a large amount of cash loss from U.S. shale oil, Wall Street has been pressing oil and gas companies to cut capital expenditures and transfer their cash to raise dividends and repurchase, debt repayment, and decarbonization. Wait for financial goals. Debt.

As a result, investment in new oil wells has plummeted by 60% since it peaked in 2014, causing U.S. crude oil production to plummet by more than 3 million barrels per day, or nearly 25%, just at the time of the Covid virus outbreak and then failed to recover. economy.

No drilling

As Wall Street gasps, U.S. shale is actually empty: According to the latest drilling productivity report from the U.S. Energy Information Administration, there were 5,957 drilled but uncompleted (DUC) wells in the U.S. in July 2021, which is since then The lowest level in any month. In November 2017, it increased from the peak of nearly 8,900 in 2019. At this rate, shale oil producers will have to substantially increase the drilling of new wells to maintain current production.

According to EIA, the sharp decline in DUC in most major onshore oil producing areas in the United States reflects more well completions, while at the same time a decrease in new drilling activity—a testament to shale producers’ continued commitment to reducing drilling. Although higher completion rates for more wells have been increasing oil production, especially in the Permian region, completions have drastically reduced DUC’s inventory, which may severely limit U.S. oil production growth in the coming months .

The two main stages to bring horizontal drilling and hydraulic fracturing wells online are drilling and completion. The drilling phase involves dispatching a drilling platform and staff, who then drill one or more wells on the platform. The next stage, completion, is usually carried out by a single worker, including casing, cementing, perforation and hydraulic fracturing for production. Generally speaking, the time between the drilling and completion phases is several months, resulting in the producer being able to keep a large amount of DUC as a working inventory to manage oil production.

According to data from S&P Capital IQ, 27 major oil manufacturers tripled their capital expenditures between 2004 and 2014 to reach 294 billion U.S. dollars, and then reduced to 111 billion U.S. dollars last year. Once the old well is topped, the new well cannot quickly fill the production gap. The question is how long the restrictions on listed oil companies will last. Capital expenditure next year is expected to reach around US$135 billion, a year-on-year increase of 21.6%, but still less than half of the 2014 level.

Shareholder return

In addition to strict restrictions on new drilling activities, U.S. shale oil has also promised to return more cash to shareholders in the form of dividends and stock repurchases.

A recent report by the progressive advocacy organization Accountable.us stated that 16 of the 24 large-scale energy companies in the United States increased their dividends this year, and 11 of them paid a total of more than 36.5 billion U.S. dollars in special dividends. Considering that the industry has reported a profit of US$174 billion so far this year, this is an impressive payout ratio. In fact, “variable dividends” that allow companies to increase their dividends when the situation is good and lower their dividends when the situation worsens have become the favorite tool of oil and gas companies.

At the same time, although Exxon Mobil (NYSE: XOM) and Chevron (NYSE: CVX) have committed to repurchase up to US$20 billion in stocks in the next two years , But oil and gas companies spent only 8 billion U.S. dollars on stock repurchases. The energy industry’s share of growth this year has been strong, which explains why it is reluctant to spend too much on stock repurchases.

However, the most important reason why oil prices may remain high in the coming year is OPEC’s discipline:

Tom Kloza, President of Petroleum Price Information Service, told CNBC jokingly: “You have a cartel, traditionally as disciplined as Charlie Sheen’s drinking, and last year, they have been as disciplined as Olympic gymnasts. Yan Ming.”

Oil shortage

According to data from the International Energy Agency, crude oil consumption is expected to increase from 96.2 million barrels per day this year to 99.53 million barrels per day, which is only slightly worse than the 99.55 million barrels per day in 2019. Of course, this will depend on whether the world can quickly control the new Omicron variant of Covid-19.

Higher oil demand will put pressure on OPEC and the US shale oil industry to meet demand. But let us not forget that many OPEC countries are already working hard to increase production, and the US shale oil industry must respond to investor requirements to control spending. So far, the U.S. shale oil industry has not reacted to rising oil prices as it did before. The total U.S. output in 2021 averaged 11.2 million barrels per day, and at the end of 2019, it set a record of nearly 13 million barrels per day. Rystad Energy’s senior analyst vice president Claudio Galimberti (Claudio Galimberti) said that US production will only increase from 700,000 barrels per day to 11.9 barrels per day in 2022.

Canada, Norway, Guyana and Brazil may try to bridge the gap between supply and demand, but several Wall Street speculators believe that this is not enough and oil prices will remain high.

In fact, Barclays Bank had predicted that the WTI contract price would rise from the current US$73 to an average price of US$77 in 2022, and pointed out that the Biden government’s sale of oil in the Strategic Petroleum Reserve is not a sustainable way to reduce oil prices. price. Barclays Bank stated that if the COVID-19 outbreak is minimized, so that demand growth exceeds expectations, prices may be higher than expected.

Goldman Sachs agrees with this bullish outlook and predicts that the price of Brent crude oil will be US$85 per barrel by 2023, compared to US$76.30 currently.