One of the questions that regularly comes up with respect to oil is the degree to which ESG-tilted policy decisions made by the current U.S. administration are limiting the new production of oil. However, for Andurand, this is a secondary factor behind the more straightforward financial and physical considerations. He cites two primary factors for muted domestic supply.
“So the first one is that already all the, I mean, a lot of the easy oil in the U.S. has been drilled. You know, generally when you come with like a new field, a new basin, well the producers will drill where it’s easier to get the oil and over time they'll get where it's a bit more challenging. So I would say that now, U.S. shale has been producing at scale for 10 years and there's still room, you know, for another 10 years of also strong supply. But I'm not sure there's room for, you know, many decades of high production and definitely high production goals. So some of it is due to the fact that the fields are getting a bit more mature.
And another reason is also because, you know, a lot of the shale oil producers in the U.S. have lost a lot of money, they’ve been focused on raising production over the years, and taking some debt against it and actually not being profitable. You know, most of them lost a lot of money at some point. The whole industry had burned through $600 billion of cash and the shareholders had taken a big hit. So producers, like production was going up in the U.S. but the firms were not profitable. Now they start start to be profitable. So now finally at current prices, they get positive cash flow and good profits. And the shareholders of those companies pressure the CEOs to not grow production too fast, because if they’re going too fast and prices crash again, then they can lose money.
This reluctance to invest more — after the industry burnt through over half a trillion dollars in the previous cycle — is not a unique view.
Analysts and industry participants regularly cite it as the primary reason we haven’t seen a more robust supply response as the price of crude increases. On a recent episode of the podcast, we spoke with industry analyst Rory Johnston, who made the same basic argument. Jeff Currie of Goldman Sachs Group Inc. has regularly pointed out the degree to which financial market incentives are rewarding companies that optimize for cash flow, while discouraging firms from investing more.
In a recent, viral, interview with Bloomberg TV, the CEO of Pioneer Natural Resources Co. said that U.S. shale is unable to grow much more, regardless of what the White House wants, partly due to physical constraints — including labor — but also due to the demands of investors.
And as Andurand points out, potential supply is constrained in places other than the U.S., too. Some OPEC+ members, particularly in Africa, have struggled to hit their allowed production quotas, owing to years of deteriorating infrastructure
Ultimately it’s the $200 level, he says, where we start to get actual demand destruction, and a potential balancing of the market.
“I think, like close to $200 a barrel -- so much higher than today. I feel like there's no demand destruction at $110 a barrel and we'll have to go significantly higher before demand can go down by enough. But that's also assuming there's no government mandate and some kind of confinement, where let's say two days a month, we are not doing anything. And we are in confinement for two days a month. I mean, there could be some solutions like that to bring demand down, but if there's no government mandate, then I think that around $200 oil will be enough to bring demand to balance the market.”
While $200 seems like an extremely high number, others in the industry also think it’s possible. In January, commodity trader Doug King said a barrel could hit that level within five years. Nigeria’s oil minister has also said it could get that high before falling back into the $150 range.