While the country is producing 300,000 more barrels of oil per day than it was in mid-March, Russia’s invasion of Ukraine — which sparked a boycott of Russian oil and increased demand for limited supply from elsewhere — is expected to keep prices high at least for the near future.
Skyrocketing prices at the pump have been a political headache for the Biden administration, with the president repeatedly labeling the high prices “Putin’s price hike” while also blaming oil producers. Republicans, for their part, have hammered Biden and called for more domestic production.
Prices spiked following Russia’s invasion of Ukraine as the West turned away from Russian oil — cutting supply by about 3 million barrels per day, according to early estimates.
To ease pain at the pump, the Biden administration announced that it would release 1 million barrels per day from the country’s strategic reserves and has also called on the industry to also extract more oil.
Oil activity is rising in response to high prices, but the increases are not expected to fully offset increased demand.
“We’re up 300,000 barrels a day, which isn’t bad, but it’s small, especially when you put it in the context of a million barrels per day coming from the [strategic petroleum reserve],” said Patrick De Haan, head of petroleum analysis at GasBuddy.
He added that in the larger context, the production increases are a “good sign, but a small cog in a very big wheel.”
U.S. production of oil was at 11.9 million barrels per day as of April 15, still somewhat lower than pre-pandemic levels. Meanwhile, the number of oil rigs — a signal of future production — has jumped to 695 compared to 438 just last year. However, De Haan described rig count as a “lagging indicator.”
“They can drill a rig and it may take three to six months to find any return,” he said.
The Energy Information Administration predicts that this year, U.S. crude oil production will increase to about 12 million barrels per day on average, just shy of the 12.3 million record set in 2019. By 2023, the agency forecasts U.S. production will average a new record of 13 million barrels per day.
A March survey of oil and gas executives from the Federal Reserve Bank of Dallas found large firms predicting their production would grow by a median of 6% between December 2021 and December 2022. Small firms predicted a median of 15% growth.
“These firms are growing production,” said Kunal Patel, a senior business economist at the Dallas Fed. However, he noted that it’s “important to remember that demand has been increasing,” which pushes prices up.
Still, there are some hurdles slowing production.
The Dallas Fed Survey found that 59% of executives said pressure from investors to “maintain capital discipline” was the biggest reason producers are exercising restraint.
Trey Cowan, an oil and gas industry analyst at the Institute for Energy Economics and Financial Analysis, described companies’ spending on production as “pretty modest compared to how they’ve reacted in the past whenever oil prices really spiked like this.”
He attributed this to a price slump in 2016, after which investors became skittish and began telling producers, “’Hey, you’ve got to figure out ways to return more to us instead of investing it back into your production and growth.’”
He said production may be stunted because companies during the pandemic produced a lot of oil from wells that were already drilled and are now having to put effort into drilling new wells before they can extract oil from them.
Other reasons cited in the survey for production restraint included environmental, social and governance concerns as well as limited equipment availability and supply chain issues.
“If investors did give them a green light — go out and spend a lot more — there’s physical constraints in doing that,” said Mark Oberstoetter, head of Americas upstream research at Wood Mackenzie.
“We’re seeing inflation on a whole bunch of things and … physical, actual constraints on things like oil field services labor, the supply of pipe and rigs and trucks, with steel prices we don’t have enough casing to actually drill these wells,” he added.
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Meanwhile, Robert Weiner, a professor at George Washington University’s business school, warned that investors may be afraid of “stranded assets” as the world undergoes a transition away from fossil fuels and towards clean energy.
“If nobody’s going to buy the oil then they’re stuck,” Weiner said.
“Who’s going to want to invest when there’s a big risk associated with the energy transition?” he added, noting that investment was still occurring, but this was slowing it down.