KEY SHOTS
- American oil miners have more ways than ever to find and extract oil, and there are plenty of them.
- But the focus on renewables, reassuring investors and stagnant refining capacity cast doubt on the need for more production.
- Federal policy lacks incentives for manufacturers.
A top U.S. oil executive raised eyebrows last week when he declared that the country’s days of booming oil production are over.
Maybe this time it will actually happen.
Countless other so-called “peak oil” predictions, some going back decades, all ultimately proved to be inaccurate. But now Scott Sheffield, chief executive of Pioneer Natural Resources, said factors beyond just finding more oil will limit US output growth.
“We just don’t have the potential to ever increase U.S. production again,” Sheffield told CNBC at CERAWeek, billed as the annual world energy conference. “We don’t have the refining capacity.”
Predictions that the US—and indeed the world—would one day run out of oil date back at least to the 1950s, about a century after Edwin Drake drilled the first oil well in August 1859 near Titusville, Pennsylvania.
However, these predictions generally focused on either the availability of oil in a country or the limits of humanity’s ability to extract it—not what to do with it afterward.
Innovative drilling techniques have repeatedly enabled energy companies to extract more oil than previously thought possible. But a number of market forces—from promises to investors to pressure on renewables—may eventually combine to limit production.
The resulting implications could reinforce the changing dynamics in the US energy sector, which is already focusing somewhat less on the search and production of oil and more on developing alternatives to fossil fuels.
As that happens, the sector’s growing commitment to delivering more stable returns for shareholders can only intensify.
Hubbert’s peak
In 1956, Marion King Hubbert, a geophysicist and geologist working for Shell Oil Co., proposed the theory that all unproduced oil, whether in an individual oil field or the total global reserves, faces a bell-shaped production curve.
Using his theory, Hubbert predicted that US oil production would peak in 1970, with global production beginning to decline in 2006.
For a long time, Hubbert appeared correct, at least for domestic oil. US production initially peaked at 10 million barrels per day in the late 1970s.
After that, oil from overseas increasingly met the demand previously filled by domestic sources. US production gradually fell to 4 million barrels per day by September 2008 – a 60% drop in roughly four decades.
What Hubbert didn’t know, however, was that drillers who had been able to search for oil 5,000 feet below the surface in the 1950s would eventually find a way to drill five times that deep.
New shale drilling techniques have revolutionized U.S. oil production in the 21st century, allowing domestic producers to once again replace foreign sources as the largest supplier to American consumers. By November 2019, US oil companies were producing 13 million barrels per day, still a high.
Not long after, however, a pandemic broke out. US manufacturers responded to expectations of a drop in demand by cutting production. In the two months since the pandemic shut down much of the US, domestic production has fallen by a quarter to 9.7 million barrels a day.
Renewables Dull Pandemic Recovery
U.S. production has since risen again, with the U.S. Energy Information Administration forecasting an average of 12.4 million barrels a day this year and 12.8 million barrels a day in 2024.
Still, mining profits beyond that appear to be challenging – for reasons unrelated to oil production.
First, renewable energy options such as solar and wind power will continue to replace fossil fuels as a means of generating energy.
Wind, solar and battery storage will account for 82% of the new electricity generation capacity the U.S. will add this year, according to the EIA. The agency predicts that the share of renewable energy sources will increase to 26% of all electricity generation by 2024, up from 22% last year. Conversely, electricity generated using natural gas – now often a byproduct of oil extraction – is likely to fall to 37% from 39%.
The drive to reduce global carbon emissions has also boosted demand for electric vehicles, which now account for 13% of all new cars sold, according to the International Energy Agency.
Of course, electric cars don’t need gasoline refined from petroleum. The last major U.S. oil refinery with a capacity of 200,000 barrels per day began operating in 1977, although one opened last year in Galveston, Texas, with a capacity of 45,000 barrels per day.
As electric vehicles gain share in the automotive market, there is no need for additional US refinery capacity. This limits new oil demand potential – even as estimates of recoverable oil have risen to 2.6 trillion barrels globally.
Breaking the cycle — A “Steep” mountain
What’s more, oil and gas producers after oil prices fell at the start of the pandemic. they promised shareholders that they would not increase production dramatically when life returned to normal.
The goal of this commitment was to break the boom-and-bust cycle that oil producers—and their investors—had become accustomed to, essentially since Drake first struck oil just before the Civil War.
The promise holds: The EIA’s domestic output forecast for 2024, four years after the pandemic began, remains below the all-time high set at the end of 2019.
Pioneer’s Sheffield noted that without more refining capacity, adding drilling equipment doesn’t make much sense, especially given the cost.
“If we all add more kits, the cost of services will increase by another 20-30%,” he said. “It takes away free cash flow.
In addition, John Hess, CEO of oil and gas company Hess Co., said there isn’t much incentive to invest in additional production capacity.
When inflation and gasoline prices rose last year, President Joe Biden asked the energy industry to increase production. However, the Inflationary Production Act of 2022 did not target fossil fuel production. Instead, it contained numerous tax breaks and federal subsidies supporting renewable projects.
“The biggest challenge is investment and the policy that supports that investment,” Hess told CERAWeek, adding that the energy industry has “a structural deficit in investment. We have higher interest rates, we have tighter financial markets.”
“All this makes the mountain steeper.
