Current State of U.S. Oil Industry: Future Difficulties and Solutions

Blog Summary

In "Current State of U.S. Oil Industry: Future Difficulties and Solutions," Will Reese addresses the ongoing challenges in the U.S. oil sector and proposes strategic solutions to mitigate future energy crises amid geopolitical uncertainties.

Challenges Facing the U.S. Oil Industry

The pandemic-induced production disruptions led to low oil prices, significant layoffs, supply chain disturbances, and bankruptcies. Post-pandemic, demand rebounded, but the industry struggled to restore pre-pandemic production levels, causing a surge in oil prices. Additionally, ESG lending constraints imposed by institutional investors like BlackRock restrict capital availability, further complicating the industry's recovery.

Key Issues

Production Recovery: The industry's inability to quickly ramp up production post-pandemic has led to high oil prices.

ESG Constraints: Strict ESG lending rules limit investment in oil production, impacting companies like ExxonMobil and Chevron.

Investment Shortfalls: Investors demand higher returns, making it difficult for oil companies to secure necessary funds.

Proposed Solutions

Encourage Energy Diversification: Promote natural gas vehicles and increase the adoption of electric vehicles (EVs) to reduce dependence on oil. This requires significant investment in EV infrastructure to avoid overburdening the power grid.

Boost Domestic Production: Invest in the Gulf of Mexico and onshore and offshore Alaska to increase oil output. Ensuring continuous leasing and supportive government policies are crucial.

Technological Advancements: Implement enhanced oil recovery techniques and digitization to improve efficiency and reduce costs.

Invest in Exploration Companies: Support companies specializing in advanced extraction technologies, like Schlumberger and Halliburton, to drive innovation.

Investment Opportunities

Investors should diversify portfolios across oil and gas companies, renewable energy firms, and advanced energy technologies to mitigate risks and capitalize on growth.

Conclusion

The U.S. oil industry needs consistent policies and diversified energy investments to ensure long-term stability and growth. The Financial Policy Council (FPC) advocates for policies promoting competition and innovation in the energy sector.

For more information, visit Financial Policy Council.

Blog Content

Over the past 2 years, the United States has battled high oil prices with potential for economy crippling oil prices in years to come if underinvestment and government restrictions continue. The objective of this blog is to identify solutions to minimize future energy crises under a challenging geopolitical environment. 

Currently the US oil and gas sector faces multiple challenges. The pandemic-related production disruptions led to low oil prices. Over the last two years, the United States has dealt with high energy costs that occasionally became overwhelming. This was primarily due to the 2020 oil industry crisis when the average oil price was $42 per barrel, and even plummeted to $16 per barrel in April. Widespread layoffs, supply chain disturbances, and bankruptcies happened during international lockdowns, causing the global oil demand in 2020 to fall from 100 million barrels per day to an annual average of 91 million barrels per day¹. After the lockdowns ended, oil demand rebounded, but the industry found it challenging to bring production back to pre-pandemic levels, leading to a surge in oil prices. 

ESG lending constraints are challenges the US oil industry is currently facing. Oil producers are now dealing with two distinct types of capital lending restrictions that did not exist before the pandemic. The most concerning one involves strict ESG lending constraints, which are being imposed on the industry by institutional investors like BlackRock. This has led to two climate-focused activists being appointed to ExxonMobil’s board of directors against the company’s recommendation, and Chevron being forced to adopt scope 3 emission reduction targets. Scope 3 targets mean that Chevron takes responsibility for emissions without imposing any emission restrictions on customers. The other lending constraint comes from natural industry factors, as investors seek higher returns on investment. This is unfortunate for consumers but makes it difficult for investors to promote growth without favorable returns. The most effective way to counteract rising oil prices due to market forces is to maintain a high level of competition within the industry. 

Energy diversification should be encouraged through competition rather than relying on anti-competitive and arbitrary mandates. High oil prices can be a great opportunity to introduce new competitors into the market, such as: 

• Natural gas-powered vehicles: With diesel gas currently at $3.66 per gallon, compressed natural gas (CNG) has been an energy-equivalent alternative for most of the past decade at around $2 per gallon². Walmart’s rollout of CNG-powered trucks for merchandise transportation, which refuel at Chevron CNG stations, is an excellent example that businesses can adopt. 
• Increasing the presence of electric vehicles (EVs) in the transportation sector: EVs draw energy from multiple sources, as shown in Figure 1 below. Each of these energy sources requires further investment, provided it is environmentally responsible, economically viable, and not hindered by unnecessary restrictions. It is crucial to add EVs to the market at a pace that does not overburden the power grid, as there have already been calls to limit residential power usage. Boston Consulting Group estimates that the United States will require $200 billion in grid upgrades by 2030, assuming 40 million EVs are in use³. The current energy sources used for charging electric vehicles are displayed in Figure 1 below. 

• Promote energy efficiency, especially in the transportation sector, by gradually transitioning to lighter-weight vehicles like aluminum vehicles, while considering safety concerns due to potential collisions with existing heavyweight vehicles on the road. Existing production should be increased in the United States through the following methods: 
  • Invest in the Gulf of Mexico (GOM) for consistent growth. The GOM currently produces 1.9 million barrels per day, with a conservative estimated growth potential of 2.1 million barrels per day that could be exceeded with regular leasing of acreage and investment. In 2023, the federal government reopened the GOM for leasing after a two-year hiatus. 70% of the 313 new leases were awarded to Chevron (75), ExxonMobil (69), BP (37) Shell (21) and Equinor (16) who are actively exploring to replace and add reserves in theirGOM portfolios⁴.These two-year gaps without lease offerings can’t be repeated without severely impacting future production in the second half of this decade, as it typically takes 4 to 10 years from a company purchasing a lease to first oil extraction⁵.
  • Invest in onshore and offshore Alaska to revitalize their oil industry, which has declined by over 75%since its peak production of 2 million barrels per day in 1988.Alaska has unexplored areas like ANWR with potential for conventional oil and gas extraction. Reestablishing Alaska’s production will necessitate assurance for companies that an unsupportive government will not halt development after investments have been made in the state. ConocoPhillips is a company that operates with the highest standards of safety and environmental stewardship that is committed to developing theWillow Project which is expected to deliver an expected recovery of 600 million barrels, peak rate of 180,000 BOPD, and generate between $8 and $17 billion to local and federal government⁶.
  • Encourage technological advancements such as enhanced oil recovery in existing oilfields to maximize oil extraction, along with digitization and artificial intelligence implementation to reduce costs. Monetization of these solutions can be met through the following investment opportunities.

• Invest in companies specializing in advanced exploration and extraction technologies.
  • Identify exploration & production and oilfield service companies with a proven history of innovation and success.Companies such as Schlumberger, Halliburton, BakerHughes, Weatherford International and National OilwellVarco (NOV) are leading oilfield service companies that provide a wide range of essential services, equipment, and technologies to the oil and gas industry. They are positioned to benefit from the ongoing demand for energy and the need for efficient and sustainable extraction methods.Investing in these companies offers potential opportunities for investors seeking exposure to the oil and gas sector, particularly as the industry adapts to new challenges, embraces advanced technologies, and navigates evolving regulations.However, it is crucial for investors to conduct thorough research and due diligence before making any investment decisions, as individual company performance can vary over time and be influenced by various factors, including market conditions and changes in management strategy.
  • Evaluate potential returns on investment based on industry growth projections and company performance.Companies with relaxed ESG commitments that can push back against hostile governments and activists will be rewarded in their stock valuation. Recent evidence of this is demonstrated in February 2023, US oil and gas majors ExxonMobil and Chevron trade at approximately 6 times their expected EBITDA for 2023, twice the average of their European competitors with stricter ESG commitments⁷. Future ESG commitments as well as the binding strength of future ESG commitments needs to be considered by investors. Companies and investors will be rewarded by ignoring ESGand focusing on return on investment. InFebruary2023 BP shares recently soared nearly 20% after announcing they are relaxing their carbon reduction targets from 40 to 25% by 2030⁸.
  • For higher risk and potential higher returns, consider investing in startups involved in exploration such as Tachyus, Quantico Energy Solutions, Raptor Rig and Seismos.

• Diversify investment portfolios.
  • Distribute investments across various energy sources and technologies to reduce risks associated with market fluctuations, regulatory changes, and technological advancements. Consider investing in established oil and gas companies, renewable energy firms focusing on solar, wind, hydro, and geothermal power, nuclear power industry players, advanced energy storage and electric vehicle manufacturers, energy efficiency and smart grid technology providers, and bioenergy and alternative fuel producers. By diversifying investments across these sectors, investors can mitigate risks associated with specific sectors or technologies while still benefiting from the overall growth and transformation of the energy industry.
  • Balance traditional oil and gas investments with alternative energy investments such as nuclear, geothermal, wind, and solar when profitable.

• Engage with industry-specific funds and investment opportunities.
  • Identifying funds and platforms focused on the oil and gas sector, as well as alternative energy, offers investors the opportunity to diversify their portfolios across various energy sources. Some examples of funds include Energy Select Sector SPDRFund (XLE), VanEck Vectors OilServices ETF (OIH), and Invesco Solar ETF (TAN). On the other hand, platforms such as EnerCom, Oilprice.com, EnergyFunders, and OurCrowd provide valuable resources, investment opportunities, and industry insights for those interested in the energy sector. By exploring these funds and platforms, investors can mitigate risks associated with specific sectors or technologies while still benefiting from the overall growth and transformation of the energy industry.

• Stay informed and actively engage with policymakers and industry stakeholders.
  • The Role of the Financial PolicyCouncil (FPC)
  • Advocate for effective policies in the oil and gas sector: The FPC actively supports and promotes policies that foster growth, innovation, and sustainability within the oil and gas sector. Through research, analysis, and collaboration with industry stakeholders, the FPC identifies key challenges and opportunities in the sector and recommends policy changes that will drive positive outcomes for the industry and the broader economy. 
  • Initiatives and contributions to the industry:
    1. Policy recommendations: The FPC develops policy recommendations based on thorough research and analysis of the oil and gas industry’s trends, challenges, and opportunities. These recommendations aim to address regulatory barriers, promote competition, and enhance investment in the sector. By providing well-informed and actionable policy guidance, the FPC helps shape the policy environment in a way that benefits both the industry and the public at large.
    2. Networking events: The FPC organizes and participates in various networking events, such as conferences, workshops, and seminars, to connect industry stakeholders and facilitate the exchange of ideas and best practices. These events provide a platform for professionals, policymakers, and investors to collaborate, share insights, and foster partnerships that can drive growth and innovation in the oil and gas sector.
    3. Educational programs: The FPC is committed to raising awareness and deepening understanding of the oil and gas industry’s complexities and challenges. To achieve this, the FPC develops and delivers educational programs, including seminars, webinars, and training courses, that cover various aspects of the industry, such as technology advancements, market dynamics, and regulatory developments. By providing accessible and relevant educational resources, the FPC helps equip stakeholders with the knowledge and skills needed to navigate and succeed in the ever-evolving oil and gas landscape.
• Call-to-Action.
  • Encourage investment in recommended solutions: Explore opportunities to invest in a diversified portfolio that includes established oil and gas companies, renewable energy firms, nuclear power industry players, advanced energy storage and electric vehicle manufacturers, and alternative fuel producers. This will help promote a competitive energy market and foster growth in various energy sources.
  • Engage with policymakers to support pro-growth and pro-competitive policies: Advocate for policies that encourage innovation, competition, and responsible environmental practices in the energy sector. Stay informed about proposed regulations and initiatives and participate in public consultations or discussions to ensure that policy makers understand the implications of their decisions on the industry.
  • Join the FPC for further discussions and networking opportunities: Connect with the Financial Policy Council (FPC) to stay updated on the latest trends, investment opportunities, and policy developments in the energy sector. Attend FPC events, participate in their educational programs, and collaborate with fellow members to promote effective policies and support the growth of the energy industry.

In conclusion the US oil industry urgently needs consistent policies that allow oil producers to invest in long-term projects without sudden policy reversals that halt new development. Meanwhile, high oil prices can enable competitors to vie for market share in the energy industry, such as natural gas and alternative energies in the transportation sector. The FPC advocates for policies that ensure each energy source reaches its potential in a competitive market, provided necessary safety and environmental standards are met. Long-term energy prosperity requires a competitive market with minimal barriers for competitors to enter.

Sign up now and join the conversation at https://financialpolicycouncil.org/blog/

References:

• Aizarani, Jessica, Apr, 2023. Daily demand for crude oil worldwide from 2006 to 2020, with a forecast until 2026. Statistica https://www.statista.com/statistics/271823/daily-global-crude-oil-demand-since-2006/ 
• “Fuel Prices” January, 2023 Alternative Fuel Data Center https://afdc.energy.gov/fuels/prices.html 
• Groom, Nichola & Bellon, Tina March 5, 2021 “EV Rollout Will Require Huge Investments in Strained U.S. Power Grids” Reuters https://www.reuters.com/article/us-usa-weather-grids-autos-insight/ev-rollout-will-require-huge-investments-in-strained-u-s-power-grids-idUSKBN2AX18Y 
• “US Gulf of Mexico Lease Sale 259 Results Show Industry Optimism” March 29, 2023 Offshore Magazine https://www.offshore-mag.com/regional-reports/us-gulf-of-mexico/article/14291700/us-gulf-of-mexico-lease-sale-259-results-show-industry-optimism 
• CostalReview.org, June 10th 2015 https://coastalreview.org/2015/06/an-offshore-timeline/ 
• “The Willow Project” April, 2023 ConocoPhillips https://static.conocophillips.com/files/resources/23copa013-willow-fact-sheet-4-7-v1.pdf 
• “U.S. Oil Majors Are Outperforming Their European Counterparts” Feb, 2023. Oilprice.com https://oilprice.com/Energy/Energy-General/US-Oil-Majors-Are-Outperforming-Their-European-Counterparts.html 
• Norton, Kit, March 23, 2023 “BP Stock Jumped 20% After Trimming Climate Targets — A Black Eye For ESG Investing? https://www.investors.com/research/industry-snapshot/bp-stock-jumped-20-percent-after-trimming-climate-targets-a-black-eye-for-esg-investing/
• “Oil and Gas Production Forecast 2022-2031” 2022. Bureau of Ocean Energy Management https://www.boem.gov/sites/default/files/documents/regions/gulf-mexico-ocs–region/US%20OCS%20GOMR%20Oil%20and%20Gas%20Production%20Forec ast%202022-2031.pdf
• “Wallmart Rolling Out Compressed Natural Gas Trucks” April 18, 2023. Homepage Newsr https://www.homepagenews.com/retail-articles/walmart-ut-compressed-natural-gas-trucks/