A Follow up to A Primer on the Global Oil Market. In a brief essay that many of you read (A Primer on the Global Oil Market), I explained that in the short run oil has a relatively inelastic supply curve. When prices go up for oil, it takes time for oil companies to ramp up for more oil production to take advantage of the higher prices. But, over the long run oil companies do respond to the high prices with more supply which ultimately brings down the cost of oil/gasoline. In fact, historically, they’ve tended to overproduce oil in these situations. This creates the historical boom bust cycles in the global oil market.
We are currently in the short run and there are some issues which may make the short run even longer, meaning prices could remain high for a longer period of time.
Despite the current high prices for oil, the top 50 oil companies have only increased their budgets by 1 percent relative to their initial plans. This means that decisions concerning new investments in the search for more oil and oil production have yet to be made. As of November 2021, US oil output was 14% lower than it was just before COVID despite a price increase of 65% from January of last year. At the same time, oil companies are currently seeing enormous profits (Exxon revenues were up 60% last quarter and Chevron reported the highest quarterly profits in 8 years) and rather than invest in the search for more oil and more oil production at this moment, they are choosing to return more of their increased profits to their investors.
In addition, all major oil companies are looking to the future and not only seeing less of a role for oil but are beginning to embrace the move to a more clean energy future. The CEO of Exxon has stated that his company is investing $15 billion over the next 6 years for a “lower carbon future.” There are other factors which will affect the decision to invest and increase oil production. Major automobile dealers (Ford, GM, Chrysler, Volkswagen, Chevrolet, and Toyota) have committed to sell only electric vehicles within the next 10 to 25 years. Deloitte predicts that by 2040, 57% of all new vehicles sold globally will be electric. Natural gas, which is cheaper and cleaner, is a competitor to oil and many heavy industries (mining, steel, iron) are developing technologies that allow them to replace oil with natural gas. All of these factors (changing oil company perspectives on clean energy, competition from gas in heavy industries, and the move to electric cars) are making oil companies question new major investments in the search for and drilling for more oil at this point in time despite the high price.
Some of you read my essay (A Primer on the Global Oil Market) and there were some comments about policies (politics) making a difference. Politics has always made a difference and can affect supply and demand of global oil. The classic example is OPEC. OPEC made political decisions to cut oil production in the late 60s and early 70s that led to dramatically high prices during the 1970s. In the short run it was difficult for oil companies to respond to higher prices but over time they did as North Sea oil, etc. came on line and companies ramped up production. Car manufacturers over time responded by producing more fuel-efficient cars. Consumers also eventually responded to the OPEC induced shortage of the 70s by purchasing more fuel efficient cars and car pooling became popular. By the mid-1980s, the price of oil began to decline as we moved closer to a global surplus of oil.
In the midst of the current rising prices and the crisis in Ukraine, OPEC, which produces 40% of the global supply of oil, has decided not to increase production although that could change should an embargo be placed on Russian oil by the west. I also note that currently within OPEC, Libyan oil production is much lower due to internal politics.
So what about Biden’s policies?
Biden was elected on an environmentalist/climate protection platform and has strengthened many of the environmental regulations associated with oil and gas production that were weakened under Trump. But, Biden’s actions also show a clear willingness to support oil, gas, and coal. In the first year of the Biden administration, it approved more than 3500 oil and gas drilling permits on federal lands, nearly 900 more than Trump in his first year (Bureau of Land Management or BLM). Note that about 8% of US production of oil is done on federal lands and about 9% of gas is produced on federal lands. The Independent Petroleum Association has indicated that it is pleased with Biden’s progress on federal drilling permits.
In the fall of 2021, the BLM put 80 million acres in the Gulf of Mexico up for auction in the largest offshore oil and gas lease sale in US history. At this point, it has auctioned off 1.7 million acres in the Gulf. Interestingly enough, environmental groups have sued the Biden administration concerning these leases and have initially won an injunction to prevent the leases from going into effect.
Biden plans to auction off oil and gas drilling rights on more than 200,000 acres across western states by the end of March, followed by 1 million acres across in the Cook Inlet off the coast of Alaska. The BLM indicated that it will allow oil and gas drilling on half of the National Petroleum Reserve in Alaska.
The decision to take advantage of more federal land for lease for oil production rests with the oil companies, the private sector.
It is reported all over social media that Biden has somehow closed active oil pipelines. That is simply not factual. Biden decided not to shut down the Dakota Access Pipeline and Enbridge Line 3 which have been targeted by environmentalists. He allows oil to flow through the Dakota Access Pipeline while the environmental study is currently taking place. He did prevent the construction of the northern leg of the Keystone XL Pipeline. The northern leg of the Keystone XL Pipeline would have transported oil (called bitumen) extracted from tar sands in Canada to the gulf coast to be refined. This crude oil is thick, more acidic, and more corrosive than conventional crude and more difficult to clean up should a leak occur. This oil that was to be refined was dedicated for export only.
While it has not approved leases on federal lands for the coal industry, several coal companies have been given breaks of royalty payments despite his pledge to end fossil fuel subsidies. In May of last year Biden cut the royalty rate for Arch Resources (Colorado) from 8 to 5 percent. The BLM under Biden has defended Trump era coal leasing plans in Montana and Wyoming this year and with energy prices rising, the coal industry will begin to purchase leases which more than likely will be approved by the administration.
The oil, gas, and coal companies have received subsidies such as preferential tax treatment for more than a century. While Biden campaigned on ending these subsidies, the legislation has stalled in Congress and more than likely will not pass.
So, Biden’s policies toward oil, gas, and coal actually paint a more confusing picture. While he has agreed to address climate change by reducing the US carbon footprint and working toward the growth of green energies (see his Build Back Better proposals), he is still cooperating with oil, gas, and coal companies.
Sources: Raymond James Financial Services and Analysts, Deloitte Professional Services Network, Wall Street Journal, CNN Business
Sources: Bureau of Land Management, Washington Post Anna Phillips, National Resources Defense Council, National Mining Association, Center for Biological Diversity, Independent Petroleum Association.
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