No one in the oil industry wants to crash this party after what they’ve been through since mid-2014 when surging US production caused the price to collapse.
By Wolf Richter for WOLF STREET.
The benchmark US crude oil grade WTI spiked by 11% in early afternoon futures trading, to $106.75 a barrel, the highest since June 2014 ($107.49 a barrel), before beginning to ease off just a tad. This is still far lower than where WTI was back in July 2008, when it closed at $145, and intraday hit the $150-mark.
WTI is now up 20% from a month ago and 75% from a year ago.
About 66% of crude oil consumption in the US in 2020 was in form of fuels for transportation. About 30% was for industrial and commercial uses, such as by the petrochemical industry. About 3% was consumed by residential users, such as heating oil.
A spike in crude oil prices pushes up the prices of transportation fuels, and thereby the cost of transportation, from commuting and flying to shipping goods. Fuel surcharges are common in the shipping industry. Transportation costs are passed on in form of higher prices of goods.
A spike in crude oil prices also pushes up the costs for all kinds of things, such as plastics, synthetic fibers for clothing, asphalt, building materials, etc., that manufacturers, in the current inflationary mindset, have no trouble passing on to the next entity in line, and finally to the consumer.
A spike in crude oil prices like this are the last thing anyone needs when CPI inflation is already at 7.5%.
US shale oil producers can ramp up production very quickly and by large amounts, as they have shown in the past, which led to overproduction and the collapse in the price of US crude oil starting in mid-2014.
This collapse in price, which continued, led to the bankruptcies of dozens of US oil-and-gas producers in two waves, 2015-2017 and 2019-2020 – The Great American Oil and Gas Massacre, as I called it. At first, it took down smaller oil-and-gas companies. In the end, it took down the bigger ones, including fracking pioneer Chesapeake, the Occidental Petroleum spinoff California Resources, offshore drilling specialists such as McDermott and Diamond, enhanced recovery specialist Denbury, and dozens more.
Over the years, investors lost hundreds of billions of dollars.
The survivors and bankruptcy-restructured companies are now all singing from the same page, the page of “discipline,” of not ramping up production and losing money, but of hanging tight and making money.
Crude oil production in the US peaked at around 13 million barrels per day in early 2020. Production plunged when the price of WTI collapsed in the spring of 2020. Production has come up some but remains about 11% below where it had been in early 2020.
This chart shows how fast production was ramped up until the price collapsed in mid-2014, which caused some slow-down in production as oil and gas companies filed for bankruptcy one after the other. But then production began to surge again in the fall of 2016 after the price bounced off the bottom of $26 a barrel. And by September 2018, the price began to collapse again as production surged from record to record:
Now the industry is in no hurry to increase production. The survivors are finally making money at these prices, and they have no interest in pushing down the price again.
But at some point, as prices rise, the temptation to increase profits will drive Wall Street money back into the oil-and-gas sector, and production will ramp up.
OPEC could also increase production – their negotiations for years have focused on how to keep production down – but they’re too in love with those high prices. No one in the industry wants to crash this party, after what they’ve been through since mid-2014.
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Ultimately high oil prices will lead to deflation imo bc other things implode in the economy. Think 2008. Thats not to say short term it is obviously inflationary.
“Other things implode(d) in the economy” back in a day when the Federal Reserve tightened in response to inflation.
Today’s MMR, day-trading & Wall Street-bootlicking clown show on the FOMC doesn’t have the motivation to tighten significantly.
Inflation is tightening on its own. People have far less discretionary income when needs become so expensive. Our economy is going to hit a wall.
If this were the case, why hasn’t inflation gone away on its own in 2021?
Jackson, when did the stimmies stop? Not that long ago in grand scheme. We are currently looking at 0 percent growth according to fednow numbers. You are inside the car crash.
Wait a minute. That chart must be fake news. Biden “shut down the oil and energy industry” and yet the chart still slopes…up!
Yep. The chart tells the truth and Biden just does “clean energy” lip service.
Actually the production chart slopes down, over 1.5 Million barrels a day from peak in 2020. Production is what matters, especially when inflation is peaking. Production is what keeps prices down.
Agreed. This is definitely not like 2014, but more like market tanking 2008 on steriods.
What are the 2022 “steroids”? Well, for the hydrocarbon fuels hoped for price gouging profits “industry”, Electric Vehicles.
WHY? Check any graphic of refinery output percentages of all the products per barrel of crude oil. 76% to 82% of the output is for transportation FUELS. EV’s, though they are still a small percentage of all the vehicles on our roads, are already putting a crimp in the hydrocarbon based fuels profits “business model” because fuel profits require a massive amount of volume.
Sufficent demand wasn’t there in 2008 and 2014 (and again when COVID lockdowns hit), so the price tanked.
Now, with high inflation and a shrinking economy threatening volume gasoline sales profts, EVs may be the straw that breaks Big Oil’s back.
WHY? Because, if the hydrocarbon industry cannot proft from selling hydrocarbon based fuels from around 80% of refinery output, there IS NO Hydrocarbon Industry, period.
Expect a clamor from certain bi-partisan Big Oil bought and paid fors to increase the “subsidies” for our loyal servants in the Fossil Fuel Industry based on, uh, of course, “National Security” (of Big Oil private profits). There really is one born every minute.
Owners of EVs. many who are quite wealthy and influential, will tell these disingenuous advocates of bigger “subsidies” that they had better bring a sandwich to that fight.
Here is a graphic of the breakdown of refinery output percentages. The hydrocarbon Industry cannot survive without volume fuel sales. Electric Vehicles are the writing on the wall for them.
https://renewablerevolution.createaforum.com/gallery/renewablerevolution/4/3-210222155520.jpeg
Thanks, very interesting take, Gelbert.
“EVs may be the straw that breaks Big Oil’s back.”
If a straw breaks the camel’s back, it is probably just a fracture, and it may take a long time for the back to sag down to the point where the camel meets its demise.
Oh no! Price of gas going to $5+, just after I bought an $80k luxury truck.
Who wants to buy it? I hate to see it go, but I’ll let you take over the payments for the $80k truck and the $100k trailer RV.
tent down by the river?
One person’s purchase is joy, fun, a reward for a life of hard work, while to another, it appears foolish.
Nope, it’s just foolish Anybody could have seen this coming
Last credit bubble into 2008 crash: folks bought that double-cab truck with a huge commute to a new exurban McMansion. Credit contracted and oil prices spiked, the construction job became a pink slip. The dream for many all went away — whoosh! The had a concentrated leveraged long bet on a few factors and didn’t even know it. The casino (and casino mentality) had quietly engulfed them.
Oh, but the good Lord loves me, I’m American! I deserve this! I tremble when I think God is just.
Well said. I agree 100%.
See my other comments for background.
Crude oil was above 100 for much of 2011-2014. Today’s prices alone shouldn’t crush the economy.
Core inflation (ex-energy) also wasn’t at 40-year-highs in 2011 & 2014.
All this inflation has a compounding effect. Americans are paying higher prices at the pump, at the grocery store, and everywhere else … and it adds up.
Perhaps shutting pipelines that were part completed was a poor choice. Time will tell.
Dont worry, joe and media will blame all inflation on russia.
The only answer will be to go “green”.
Congress will do their part. Perp walking the oil companies in front of their media for obscene profits.
You mean they will be paraded because they actually ARE holding off production to make obscene profits. Of course they are, it is the American way to raise prices to what people are willing to pay.
Think the $80,000 pickup truck that drinks gas like a wino at a wine tasting.
Green and Reality have interesting ways to collide!
I suspect the pile-up will be rather painful.
So will the alternative, bye and bye.
Profits which will still be lower than Apple, Google or MSFT now.
Not that I want to pollute this great blog with politics, but didn’t the gov’t just cancel an oil pipeline from Canada AND cancel drilling permits on public lands? Bad timing. And sweet revenge for the oil companies who have been scape goated as the bad guys all these years.
Russia gets about a $1 billion a day hard currency for oil PER DAY. You could say we are paying for their war effort. Taking money away with our right hand (sanctions) and giving it back with the left hand (oil, wheat).
The good news is people will shift from large SUVs and trucks, into sedans and EVs. Elon is smiling today.
“… cancel an oil pipeline from Canada AND cancel drilling permits on public lands?”
1. The pipeline only replaces oil trains. It doesn’t add new supply to the US. It allows the Canadian producers to make more money because pipeline transportation costs are lower than oil trains, and that Canadian oil has to compete on price with US oil. So a pipeline would simply increase the profit margins of Canadian producers, not increase supply.
2. “cancel drilling permits on public lands.”
A. This doesn’t impact anything this year. Every oil and gas company is warehousing drilling permits for future use. So this would limit production sometime in the future. But only on public lands.
B. The most productive US producing region, the Permian (Texas and New Mexico) is mostly on private land, as are many others, and they’re not impacted at all by this.
Wolf, in just a weeks or two the yields on US tresauries dropped by about 0.25-0.35%, depending on duration. Perhaps 0.5 hike is priced out.
Hi Wolf, if that’s true re the pipeline then if XL had gone ahead then there would have been more efficiency on cost of operation as well as the potential expanse of oil recovery and then possibly cheaper fuel for the US customers. So both sides would have gained.
Yes, it would have been a lot more efficient to transport oil via pipeline — and likely safer too. But building the pipeline is a huge undertaking, so it takes years of higher efficiencies to pay for the construction costs. Nevertheless pipeline operators know how to do this math and charge accordingly.
But for US customers (refiners), the price is determined by competition, and the markets, not the costs of transportation or the cost of production. Tar-sands production is costly. But that doesn’t matter to pricing in the US. There is already over-production in the US — which crashed the price.
Who owns trains = Berkshire I own the stock
The cancelled Keystone XL pipeline was to carry 830,000 barrels per day. Rail transport from Canada set a record in Jan 2019 of 205,000 bpd. Compare that with Dec 2021 of only 117,000 bpd (source US EIA). It would appear a lot more Canadian oil would arrive in the US if the pipeline had been built instead of cancelled. Perhaps Russian oil took its place.
The last thing the US needs is more foreign oil. Overproduction in the US caused the price of oil to collapse. The US was the largest oil producer in the world before the price went negative.
Harrold/Wolf-my memory may be faulty, here, but wasn’t the bulk of any CDN XL oil destined for export from Nawlins/Houston to other than U.S. markets? (Pipeline much easier/cheaper to run over the Great Plains than over the Rockies…).
may we all find a better day.
I wish that was true, but the dystopian reality appears to evidence continued government support for the hydrocarbon Industry “business model”, to put it mildly:
Nexus Hot News
March 1, 2022
US Sought To Strike Loss And Damage, Adaptation Finance From IPCC SPM
The U.S. led a bloc including Germany, France, Spain, the Netherlands, and Norway in pushing to replace the phrase “losses and damages” with “adverse impacts.” … …
“The Biden administration is not only shutting their eyes to the reality of the climate crisis – they’re trying to blindfold the rest of the world too,” said Teresa Anderson, climate policy coordinator at ActionAid International. “They appear to wear a badge of climate leadership, while doing all they can to block those most in need from getting help. It’s dishonest and utterly shameful.” (Climate Home)
Americans love big cars and trucks. It may take 6 dollar gas to cure that habit.
Why must Americans be cured of their love of big cars and trucks? This is still America, yes? It is still their money, yes?
Are you suggesting a rev limiter on Americans appetite/ability to purchase wth they want if they can afford it?
As they say… asking for a friend.
Weight of Chevrolet 1500 Silverado: ~4500 lbs.
Weight of Tesla Model S: ~5300 lbs.
EVs are more massive with less hauling and towing capability than full-sized population trucks.
A national avg of $4 will create a lot of harping, especially with falling asset prices.
Or, alter what one buys?
Cut back in other areas to purchase that which is important to you?
Yep. Electric Vehicles are a BUY!
Energy hog oil or gas fired furnace manufacturers have a dim future.
Electric Heat Pump manufacturers have a bright future.
If I have to give up vodka, can I at least have a keystone?
I have one myself. The choice is mine. Or yours.
What about a tax on these big cars and trucks based on the weight? That would encourage smaller cars and less gas consumption. Less Carbon emissions and pollution. I am so sick of listening to all of these whining dogs complaining about high gas prices, when the free markets is operating just like it should.
Would like to ev cargo bicycle
“Free” markets?
You have got to be kidding.
Charles Hugh Smith – January 28, 2022
“The Federal Reserve and U.S. Treasury have institutionalized moral hazard, the disconnect of risk and consequence, for America’s financial elite: rather than force those who gambled and lost to absorb the losses in 2008-09, the Fed and Treasury bailed out the too big to fail, too big to jail financial elite, establishing an unspoken policy of encouraging the wealthiest individuals and enterprises to borrow and gamble freely, knowing they could keep any winnings (and pay low or no taxes on the gains) and transfer any losses to the Fed and/or taxpayers.”
Correction: 404,000 bpd was Jan 2019. See previous comment
It needs to be borne in mind that commodity prices are not just commodity values. Each reflects not one, but two commodities; the commodity being priced and the unit it’s being priced in.
So oil prices, in dollars per barrel, are not merely a function of supply and demand for oil, but also of the supply and demand for dollars. In other words, the incredible increase in the supply of dollars over the past couple of years has as much if not more to do with soaring oil prices as it does with oil.
As are houses, autos, pizza, groceries, and all items contributing to current inflation…
Suck up the dollars and pricing per unit desired will decrease…
i.e., deflation…
After stagflation…
Giving credit to the pundit who keeps repeating that many Americans will become poorer with a decreased standard of living, good call…
And you too, Finster…
Well…at least we know where all the folks that flunked out of high school ended up……..Washington DC.
That level of dense only comes from ivy league.
Got that right Andy
There is a $20 backwardation against October delivery.
The market very clearly thinks the medium term price is going down and that this is a short term squeeze (the gas markets are quite different).
So do I.
If you want to buy Oil you can buy October delivery for $85. You make $20 just for taking the trade on if you are brave enough.
And, it’s only early March. The summer gas switch doesn’t happen until 5/1, easily adding $0.10 to 0.15. Let’s see if we can set a record before labor day.
Nice to have a couple of EVs in my household. Kind of takes the sting out of those gas prices.
Oh? NG prices have come down?
High nat gas prices = high fertilizer prices. Another Arab spring coming? Not a good time to be a poor person without your own sources.
DawnsEarlyLight,
Actually, yes. US NG was in the $6 range in Oct and Nov last year. Now it’s at about $4.50, which is still high for US NG.
But yes, agreed, electricity prices have not come down. But they’re not up by 30%+ either, as gasoline is.
Wow, that is a sizable drop!
With the cancelation of the Keystone pipeline on a whim and the loss of billions of infrastructure investments….
Yeah, I can see why no business who be in a rush to be kicked in the sack like that too.
This is Joe and Justin’s cunning Plan to stop any Truckers reaching DC, they will be broke !
I hope the Truckers come here shut this whole place down. It would serve these crooked politicians just right. If you ever wondered what it will look like, just watch the movie “Fist” where a convoy came here and gridlocked all the DC streets in front of the White House. What a sight.
Ever have to look for a parking space or have city working on yr street so no parking. The folks who LIVE where the streets were blocked had it for 3 weeks. Looks like fun on TV though.
So, that blows up the price of asphalt shingles and I need a new roof. Maybe I’ll get a metal roof? Wait… there’s no metal available. I wonder if cardboard would work…
You only need a thin plastic tarp to cover your tent under the highway overpass.
thatch?
I saw went to movie in 1972. Then it was OPEC, now it is Russia and OPEC.
Getting really comfortable in the control chairs granted them by this administration’s self destructive energy policy. This time because we are not producing our own, we are compounding the problem by drawing from the international market and from our enemies in particular.
Diving off the high dive into a dry pool, betting the lives of US Citizens that it will rain enough on the way down to fill the pool.
The inevitable crash landing is coming.
I have a little 4 cylinder car but, considering getting a Ford Fusion Hybrid at this rate. $6/gallon gas will cure my need for eating and it will result things very lean in the budget. As one of average citizens and consumers, the economy will be crashing and burning soon since we are the majority of spenders.
Chris, you will have to buy used and the price will be stiff. You will have to do a lot of driving to make this deal feasible.
Of course no one is mentioning that lifting sanctions on Venezuela and Iran would relieve inflation, tank the price of oil and gas, destroy the Russian economy and make the war in Ukraine unaffordable, and bankrupt most of the energy companies. Who said Sanctions are about politics or principles?
Venezuela is broke and their oil infrastructure purportedly needs a lot of funding. They are in no position to substantially increase production.
Last I heard, they were sending a lot of oil to China as payment for loans. This means China needs to buy less from someone else which makes it a wash.
Henny Youngman
“Now, take the dollar…………………………………………please.”
Do not worry. CPI will rejigger on the basis that people can simply carpool, eat less, and cool themselves with paper fans. Do not worry.
a lotta things you just do on rote, and be thankful for your conservative stewards.
Obey. Consume. Reproduce. 😉
i just wish step back, things are ok, we is all going to get thru this
This is the part of capitalism I donot want…
1. Oil and petroleum exporting countries and companies coming together to “fix” prices. In an ideal capitalism, increase in demand will increase production and supply the demand.
2. Now, oil is an essental commodity. We eat “oil” directly or indirectly. Half of everything we do is “oil”.
3. Imagine a drug maker or drug makers come together and say, there is a disease, we have a cheap drug but…but I want to make profits, lets sell insulin for $200. or sell meth to kids or sell pain drugs to everyone or vaccines
4. This is an good example of crony capitalism.
5. This is not, “I earn my money, I buy car and put gasoline” argument. because, all the food, and essential stuff depends on oil prices. There must be a limit to oil prices.
6. Did anybody see trucker convoy in the DC swamp area?
You’re SOOO wrong CP , on many many aspects of your line of thought!
Dare I say that you should never ever delve into subjects like “ economics, geopolitics, pharmaceuticals commentary”
In plain English, stick to programming computers,! Even that would be a huge hazard to humanity in general !!! :)
Don’t take it personally like Wolf ( the thin hide economist of late)!!!
If this was not so devious it would be hilarious.
The fed is thinking of delaying rate hikes due to the effect inflation has on consumer spending….might cause a drop and hence a recession.
So the crooks delayed any hike long enough to justify more thefts based on…….their crooked behavior!
and they wonder why we don’t have a chance. The Russian rich are killing the Ukraine while their American cousins are creating a nation of the rich and one big underclass.
fred-historically, oligarch’s tend to oligarch, as reaching that position is an acclaimed and sought-after position in our global economic system (“…money doesn’t talk, it swears…”, and avoids the necessities of being ‘born’ into ‘royalty’). Been a long time since there’s been any serious trust-busting sentiment among the general populace in our casino (and, unlike the ‘happily ever afters’ depicted in much of our mass entertainment, that is an effort that requires constant PITA scrutiny and attention…).
may we all find a better day.
The War in Ukraine will be front and center when Powell testifies Wed & Thurs. Look for him to be the coward in chief and back off any substantive rate increases. The .25% increase has already been discounted and will be the biggest non-event in history. More of the same. Savers will continue to be taken to the cleaners as inflation roars and surpasses double digits, and gas at the pump approaches $7/gallon. I’ve just seen stations in the Swamp already increasing gas prices by .20/gallon with more to come.
The Powell put is a tax on savers, a holiday for debtors (and various life-mismanagers), and a pox on price discovery. I wonder how many firms are zombies if the happy juice infusions are withdrawn. Certainly many households are that.
One party will keep the swill going, the other party will introduce many to the cold streets and usher in chaos (that hits folks like me who do not fly to gated Aspen palaces). Nice set of choices we have wandered into.
that swamp with the luscious carbon dioxide vegetation, where mermaids flow
Part of the price of oil is speculation that the war against Ukraine might reduce Russian oil exports.
There is more oil in the ground. It takes time for the high oil prices to result in higher oil production. Government regulations reducing drilling activity will not increase oil production.
Always will be oil!
The problem is the price of get it!
World system like complex structure has a limit!
Maybe we are in!
Doesn’t the inflation squeeze on the family finances seriously lag the onset of inflation? I never see anyone paying cash for anything, it’s all on the card for the points and then paid down/off monthly with a balance transfer from the checking account, which no one ever balances anymore by the way. Doesn’t it take forever for people to see – wilfully blind or not – that the disposable income is evaporating, until they get to the point that there is not enough $$ in the checking account to pay the monthly care balance?
The Great American Consumer keeps on rolling, like a runaway train, until they jump the track or hit the end of the line.
I would love to see some data on that.
TF/phleep-apocryphal, to be sure, but i’ve encountered many, many of our fellow citizens, over many, many years now, who go no further in their economic planning than: “…what’s my monthly payment?…”
may we all find a better day.
People are beginning to “circle the wagons” around their existence.
Hunker down. See what happens next.
In a system that brags of “checks and balances”, who checks the unelected Fed?
IF it is patriotic to pay your taxes, then what is the systematic depreciation of the National currency’s buying power? ( the Fed promoting Inflation)
Are you going to hand over monetary policy to the masses? With their current track record? God help us.
There is no monetary policy in the US Constitution. Actually following it would solve that problem.
As long as Russia’s oil & gas make it to the market, any market (i.e. China), then prices should not increase. The oil that China would have otherwise purchased from someone else would go elsewhere, thus the overall market stays the same. The only time Russia/OPEC really hurt us is when they don’t pump any oil and/or reduce deliveries. Why wars over oil are meaningless unless they don’t sell it, then it’s fighting time:)
Well put. The Chinese will get a discount on their purchases of Russian oil so in that manner the Russians get hurt. Maybe that gets the Russians to pump MORE oil which might guide prices down a bit… but who knows?
1) Coal is filthy. Nuke kill.
2) The cure to high oil prices are high prices.
3) Crude oil futures 3/2/22 : 107.31.
4) US & Europe new regulations will boomerang. Europe will enter a recession. US might follow.
5) Putin will buy western oil co Russian assets for twenty five cents/ dollar.
Yes crude in fall priced at 85 /usd
Investment on commodities including oil has been lower for a long time.
This has been the result of large oil developments in USA from access to capital as supply increased eventually exceeding demand when Saudi and other low cost producers increased supply at prices below cost of capital for the USA shale players.
The decline of shale production is high and when one couples that decline with negative oil prices in May 2020 and the before mentioned destruction of the USA oil company finances because of misallocated capital the result is price normalization and inflation.
Biden was not the cause of this spike in oil neither was Trump rather brought on by the Wall Street easy money polices since 2008.
julian simon statistics all over the place, you just don’t know it, because you’ve got that whining DNA that has its evolutionary place
I’m waiting for the 1st station in the US to report $7/gallon. It will probably be in SF, Wolf’s hometown.
San Diego is in hot competition for the privilege.
Years ago I created a lifestyle necessitating hardly any gasoline use. I’m one block from the grocery and big box stores, five miles from mom’s house, 10 miles work commute each way, twice a week. Also many household products are stockpiled from buying sprees in better times. I do this intuitively, but when stuff gets tough, it is all so easy and stress-free. I never missed a minute of sound sleep in the whole GFC. Short lines of supply, if something breaks, it is small.
oilystuffblog.com–US shale oil is depleting fast and the best spots have been drilled already. No price can bring back US production to previous highs. Saudi’s spare capacity is suspect.
Nah. Watch what happens to production as oil goes higher.
I always respect your opinion but I’ll bet you a six pack that US oil production doesn’t surpass 12.2 bbd anytime in the next year (currently at around 11.2 million bbd today). Depletion is a bitch.
Rick,
Depletion of economically feasible shale oil is getting moved out by higher prices. What’s not economically recoverable at $60 a barrel suddenly is at $120 a barrel. This is not at all static.
And yes, there will eventually be depletion of some sort, but not this year or next year. People have been wrong about the timing of “depletion” forever. Fracking will tear up the earth and pollute ground water and the air and trigger earthquakes, but the industry won’t run out of oil to drill for years.
Long-term, for example: California sits on huge hydrocarbon deposits in the Monterey Formation. But it is not economically recoverable at today’s prices and technologies, and the project was scuttled a few years ago when the difficulties became more apparent. But the formation is still there, waiting for the price and technologies to make it economically recoverable. This is happening everywhere.
There are financial reasons why production is down: the industry got mauled and hundreds of oil and gas companies went bankrupt since 2015, and investors lost hundreds of billions of dollars because starting in 2014, US overproduction cause the price of oil to collapse. And now no one wants to get this price to collapse again. So they’re very slow in ramping up production. This is the new “discipline.” And it is easier to maintain because the restructured US shale oil industry has consolidated with fewer but bigger players.