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It's weird how oil companies are purposely restricting supply. They have production capacity ready to go and not in current use and raw materials, but money is

by feet 4y ago

It's weird how oil companies are purposely restricting supply. They have production capacity ready to go and not in current use and raw materials, but money is nicer to pad their bottom line.

nradov 4y ago
There's nothing weird about it. During the 2020 presidential campaign, Joe Biden promised to shut down new oil drilling. Thus the domestic oil companies cut their investments in new production capacity. https://www.politifact.com/factchecks/2020/mar/20/facebook-posts/debate-joe-biden-said-no-more-oil-drilling-and-no-/ https://www.politifact.com/factchecks/2020/mar/20/facebook-p...
- feet 4y ago
  https://www.cnn.com/2022/03/02/energy/us-oil-production/index.html https://www.cnn.com/2022/03/02/energy/us-oil-production/inde... https://www.cnn.com/2022/03/24/energy/gas-prices-oil-production-wall-street/index.html https://www.cnn.com/2022/03/24/energy/gas-prices-oil-product...
- rayiner 4y ago
  It’s been made clear to American oil companies that they’re in the buggy whip business. What sense does it make for them to make new investments increasing their buggy whip production capacity?
  - refurb 4y ago
    Precisely. And not to mention how carbon taxes are espoused as a great way to disincentivize the use of oil. Then oil prices go up and the government decides to intervene and drop oil prices through the strategic petroleum reserve (federal) or cash handouts (CA). It’s bizarre. Either higher gas prices are good or they aren’t.
- credit_guy 4y ago
  There are thing that the President of the United States can do and thing he can't do. He can stop the issuance of new permits to drill on federal lands. But he can't stop companies from drilling on places where they already have a permit, federal or not. Implicitly, a candidate cannot promise more than a President can deliver, and that's why Biden and his team were vague about what "shut down oil drilling" meant. The technical term (on Wall Street) for oil companies is "Oil and Gas Exploration and Production" companies [1]. Note that "exploration" is mentioned ahead of "production". Banks have special departments dedicated to lending to O&G E&P companies, and the lending standards are mostly described in the regulatory handbook [2]. If you take a look there, you'll see that lending in that space is mostly about reserves. E&P companies carefully husband their reserves. They need to have all levels of reserves, from proved and developed to proved and undeveloped to probable and then to possible. As they extract oil and gas, they need to continually upgrade their existing reserves (for example from possible to probable), and to acquire new rights of exploration. All this is very complex because the price of oil is volatile. In Spring 2020 the price of oil reached record lows (including negative futures prices for a few days). In Spring 2022, it reached recent record highs, but oil executives have a longer time horizon in their planning, because prices can plummet in a hurry (as we speak, they've already dropped 25% from their peak). Bottom line, the oil companies have inertia. Just like an 18-wheeler can't turn as quickly as a personal car, they can't change their operations as quickly as people would like them to. But of course, both Biden's administration and the oil executive will try to score points. The administration claims that the oil industry is artificially restricting its own output in order to keep prices high and maximize profits, while the oil executives will try to pressure the administration to allow new permits on federal lands. [1] https://en.wikipedia.org/wiki/List_of_oil_exploration_and_production_companies https://en.wikipedia.org/wiki/List_of_oil_exploration_and_pr... [2] https://www.occ.gov/publications-and-resources/publications/comptrollers-handbook/files/oil-gas-exploration-prod-lending/pub-ch-oil-and-gas.pdf https://www.occ.gov/publications-and-resources/publications/...
  - junofan 4y ago
    Why not issue permits? The next administration will issue them anyway. In the meantime, all you’re doing is driving up prices. I believe that is what people are referring to.
- tzs 4y ago
  They have plenty of existing leases that they have not yet developed and for which there are no regulatory impediments to developing them. The reasons they are not investing in new capacity in response to the current high prices are, according to the oil companies themselves, that they don't think the price is going to stay high, there are worker shortages from the pandemic, and (this is the biggest reason) investors want the oil companies to concentrate on consistent profits instead of the boom and bust way things were. In a survey of oil producers by the Federal Reserve Bank of Dallas [1], they found that 60% of publicly traded oil producers are restraining growth because of investor pressure to maintain capital discipline. Only 11% said they were restraining for environmental, social, and governance issues, and only 6% said it was due to government regulations. The money that they would have invested in new production is going to dividends and stock buybacks. [Edit] PS: Forbes says that they are greatly increasing drilling, with a 60% increase in the number of oil rigs over the last year [2]. [1] https://www.cbsnews.com/news/oil-production-prices-us-companies-wont-increase-2022-dallas-fed-survey/ https://www.cbsnews.com/news/oil-production-prices-us-compan... [2] https://www.forbes.com/sites/rrapier/2022/03/27/oil-companies-have-increased-drilling-by-60-in-one-year/ https://www.forbes.com/sites/rrapier/2022/03/27/oil-companie...
  - landemva 4y ago
    > maintain capital discipline. And why? No rational investor will invest capital when collection pipelines and distribution pipelines will not be permitted. Returns on capital investment in refineries is paid back over decades. A rational investor will not allocate capital to new refineries. It's like domestic nuclear after Carter stopped development of fuel reprocessing - further investment is done for many decades.
- fomine3 4y ago
  And ESG investing. I wonder what S stands for.
JamesBarney 4y ago
Which oil company has capacity? And what sense would it make for them to restrict supply? The only organization that has enough market power that it makes sense to restrict supply is OPEC.

by feet 4y ago

It's weird how oil companies are purposely restricting supply. They have production capacity ready to go and not in current use and raw materials, but money is nicer to pad their bottom line.

nradov 4y ago

There's nothing weird about it. During the 2020 presidential campaign, Joe Biden promised to shut down new oil drilling. Thus the domestic oil companies cut their investments in new production capacity. https://www.politifact.com/factchecks/2020/mar/20/facebook-posts/debate-joe-biden-said-no-more-oil-drilling-and-no-/ https://www.politifact.com/factchecks/2020/mar/20/facebook-p...

feet 4y ago
https://www.cnn.com/2022/03/02/energy/us-oil-production/index.html https://www.cnn.com/2022/03/02/energy/us-oil-production/inde... https://www.cnn.com/2022/03/24/energy/gas-prices-oil-production-wall-street/index.html https://www.cnn.com/2022/03/24/energy/gas-prices-oil-product...
rayiner 4y ago
It’s been made clear to American oil companies that they’re in the buggy whip business. What sense does it make for them to make new investments increasing their buggy whip production capacity?
- refurb 4y ago
  Precisely. And not to mention how carbon taxes are espoused as a great way to disincentivize the use of oil. Then oil prices go up and the government decides to intervene and drop oil prices through the strategic petroleum reserve (federal) or cash handouts (CA). It’s bizarre. Either higher gas prices are good or they aren’t.
credit_guy 4y ago
There are thing that the President of the United States can do and thing he can't do. He can stop the issuance of new permits to drill on federal lands. But he can't stop companies from drilling on places where they already have a permit, federal or not. Implicitly, a candidate cannot promise more than a President can deliver, and that's why Biden and his team were vague about what "shut down oil drilling" meant. The technical term (on Wall Street) for oil companies is "Oil and Gas Exploration and Production" companies [1]. Note that "exploration" is mentioned ahead of "production". Banks have special departments dedicated to lending to O&G E&P companies, and the lending standards are mostly described in the regulatory handbook [2]. If you take a look there, you'll see that lending in that space is mostly about reserves. E&P companies carefully husband their reserves. They need to have all levels of reserves, from proved and developed to proved and undeveloped to probable and then to possible. As they extract oil and gas, they need to continually upgrade their existing reserves (for example from possible to probable), and to acquire new rights of exploration. All this is very complex because the price of oil is volatile. In Spring 2020 the price of oil reached record lows (including negative futures prices for a few days). In Spring 2022, it reached recent record highs, but oil executives have a longer time horizon in their planning, because prices can plummet in a hurry (as we speak, they've already dropped 25% from their peak). Bottom line, the oil companies have inertia. Just like an 18-wheeler can't turn as quickly as a personal car, they can't change their operations as quickly as people would like them to. But of course, both Biden's administration and the oil executive will try to score points. The administration claims that the oil industry is artificially restricting its own output in order to keep prices high and maximize profits, while the oil executives will try to pressure the administration to allow new permits on federal lands. [1] https://en.wikipedia.org/wiki/List_of_oil_exploration_and_production_companies https://en.wikipedia.org/wiki/List_of_oil_exploration_and_pr... [2] https://www.occ.gov/publications-and-resources/publications/comptrollers-handbook/files/oil-gas-exploration-prod-lending/pub-ch-oil-and-gas.pdf https://www.occ.gov/publications-and-resources/publications/...
- junofan 4y ago
  Why not issue permits? The next administration will issue them anyway. In the meantime, all you’re doing is driving up prices. I believe that is what people are referring to.
tzs 4y ago
They have plenty of existing leases that they have not yet developed and for which there are no regulatory impediments to developing them. The reasons they are not investing in new capacity in response to the current high prices are, according to the oil companies themselves, that they don't think the price is going to stay high, there are worker shortages from the pandemic, and (this is the biggest reason) investors want the oil companies to concentrate on consistent profits instead of the boom and bust way things were. In a survey of oil producers by the Federal Reserve Bank of Dallas [1], they found that 60% of publicly traded oil producers are restraining growth because of investor pressure to maintain capital discipline. Only 11% said they were restraining for environmental, social, and governance issues, and only 6% said it was due to government regulations. The money that they would have invested in new production is going to dividends and stock buybacks. [Edit] PS: Forbes says that they are greatly increasing drilling, with a 60% increase in the number of oil rigs over the last year [2]. [1] https://www.cbsnews.com/news/oil-production-prices-us-companies-wont-increase-2022-dallas-fed-survey/ https://www.cbsnews.com/news/oil-production-prices-us-compan... [2] https://www.forbes.com/sites/rrapier/2022/03/27/oil-companies-have-increased-drilling-by-60-in-one-year/ https://www.forbes.com/sites/rrapier/2022/03/27/oil-companie...
- landemva 4y ago
  > maintain capital discipline. And why? No rational investor will invest capital when collection pipelines and distribution pipelines will not be permitted. Returns on capital investment in refineries is paid back over decades. A rational investor will not allocate capital to new refineries. It's like domestic nuclear after Carter stopped development of fuel reprocessing - further investment is done for many decades.
fomine3 4y ago
And ESG investing. I wonder what S stands for.

JamesBarney 4y ago

Which oil company has capacity? And what sense would it make for them to restrict supply? The only organization that has enough market power that it makes sense to restrict supply is OPEC.