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IEEFA: Wild price swings fail to satisfy either oil and gas industry or consumers

December 10, 2021
Clark Williams-Derry

The price of oil has become a lot like the weather: If you don’t like it now, wait a minute. 

No matter what the price of oil or gas, someone’s unhappy

In the spring of 2020, oil markets went into a deep freeze, with the Covid-19 pandemic, a Saudi-Russia price war, and growing supply gluts pushing U.S. oil prices into negative territory for the first time. But as oil demand rebounded in mid-2021, energy markets overheated and oil prices reached their highest level since 2014. Natural gas markets were much the same, with record low prices in 2020 followed by multiyear highs in 2021. 

The past few weeks have brought milder conditions. Covid lockdowns, jitters over the Omicron variant, and strategic releases of government oil reserves briefly pushed oil prices down by almost $20 per barrel before recovering modestly. In percentage terms, U.S. natural gas prices fell even faster than oil. 

TWO YEARS OF WILD PRICE SWINGS HAVE DEMONSTRATED ONE THING: No matter what the price of oil or gas, someone’s unhappy. Some like it hot, some do not.

Last year, low oil prices helped anxious consumers save money just when they needed it most. But those same low prices were devastating to oil and gas companies and to the investors who had waited for more than a decade for the U.S. fracking sector to finally generate cash returns. 

This year, oil and gas companies have reveled in a bumper crop of cash. But high energy prices have stoked inflation fears and outrage at the gas pump.

This dynamic has laid bare a fundamental conflict in the fossil fuel economy. The interests of consumers and producers are diametrically opposed. Consumers want prices to stay low. Oil and gas companies need prices to stay high.

IF THERE IS A MIDDLE GROUND, IT’S HARD TO FIND. Prices high enough to please oil and gas companies create economic pain, inflation, and political pushback from consumers. But when prices are low enough to keep consumers happy, the bottom falls out of oil companies’ bottom lines.

This is true not only in the U.S., but globally as well. Just a few weeks ago—a lifetime in oil markets—major oil-importing nations in Asia joined the U.S. in opening up strategic oil reserves to help ease prices. But in response, OPEC and its allies threatened to rein in production to keep prices high. Many OPEC nations need high prices to balance their national budgets and replenish their coffers. But for countries that import much of their oil, high energy prices dampen the economy and create balance-of-trade challenges. The interests of importers and exporters are hard to square.

THE U.S. NOW PRODUCES MORE OIL AND GAS THAN ANY OTHER NATION, but it consumes more as well. Here, disputes over energy prices have created new conflicts and strange political bedfellows. 

Disputes over energy prices have created new conflicts and strange political bedfellows

Take the recent salvos by the Industrial Energy Consumers of America, a trade association of U.S. manufacturers, against the U.S. liquefied natural gas industry. North America’s LNG companies are exporting more and more natural gas to overseas markets. Reasonably enough, manufacturers are blaming rising exports for high natural gas prices, and are demanding the Department of Energy pause new gas-export projects. 

The manufacturers’ stance dovetails perfectly with calls by Sen. Elizabeth Warren, D-Mass., to rein in LNG exports to ease high utility bills—a position that has put her squarely at odds with gas producers. These conflicts between sellers and buyers have created new fault lines, pitting major industries against one another and converting the rock-ribbed manufacturing sector into an ally of progressives and consumer advocates.

Despite recent price declines, the globe’s oil and gas producers are in the driver’s seat for now. With the full backing of Wall Street, oil and gas companies are exercising “capital discipline” that looks for all the world like OPEC quotas. America’s oil companies are simply enjoying high prices too much to return to their pre-pandemic habit of overproduction.

This excerpted commentary was first published in Barron’s. Read the full article ($): As Oil Prices Swing, Producers Are in the Driver’s Seat

Clark Williams-Derry (cwilliamsderry@ieefa.org) is an IEEFA analyst.

Related items:

IEEFA. Short-term oil and gas gains likely to be replaced by long-term productivity pain

IEEFA. The Goldilocks predicament: For oil and gas, there are no “just right” prices

IEEFA. Booming U.S. natural gas exports fuel high prices

Clark Williams-Derry

Clark Williams-Derry focuses on the finances North America’s oil, gas, and coal industries. His areas of expertise include: the long-term financial performance of North American oil & gas companies, particularly fracking-focused enterprises; company- and basin-specific studies of oil and gas production; U.S. LNG exports in the context of global markets; and U.S. and Canadian coal export projects.

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