Source: Jon N. Hall
In the media, speculation abounds over whether the price of a barrel of crude oil might soon top $100. The day that the U.S. benchmark West Texas Intermediate crude first traded above $100 was during the first day of trading in 2008. But on that January 2, WTI closed below the century mark, at $99.62. The price would sag for a few weeks more, but then it surged, and on February 28 WTI closed above the psychological hundred-bucks-a-barrel barrier for the first time, at $102.60.
The all-time high for WTI is $145.31, set on July 3 of 2008. But prices quickly headed southwards, and at the close of trading on December 23, 2008, a barrel of WTI crude would put a trader back exactly $30.28, the year’s low, and a downdraft of about 79 percent in under six months.
Of course, we’re talking 2008 here, a nasty, particularly odious year. A year spent entirely in recession, which in the autumn saw a near-fatal collapse of the financial system. But 2008 is also significant because back then the U.S. was importing a lot more oil. About a decade later, however, we were “energy independent.” That was due almost entirely to the development of shale oil, i.e. fracking.
Shale oil production increased after 2008 by a factor of 10, and by 2018 shale oil accounted for more than half of U.S. petroleum output. Although the 2008 campaign slogan “drill, baby, drill” used by Sarah Palin was a reference to ANWAR, it was co-opted by shale oil drillers. The stance gave the shale oil business a patina of the Wild West. That led to the U.S. being awash in oil by 2020, just in time for the pandemic.
The 2020 supply glut was such that oil storage was so stretched that it forced “oil tankers to become floating storage.” The combination of the oversupply of oil coupled with the steep drop in demand due to the shutdown of the economy produced the perfect storm to damage oil prices.
On April 20, 2020, WTI traded for as low as negative $40.32 a barrel but closed the day at negative $37.62, the record low. WTI continued trading in negative territory for part of the next day. If the six-month assault on WTI oil prices in 2008 seems like a protracted war of attrition, then oil prices in 2020 suffered a one-day blitzkrieg.
In 2020, 108 North American oil and gas companies filed for bankruptcy. The carnage, however, could not be pinned solely on the government’s excesses and errors in the handling of the pandemic; U.S. shale companies needed to be run differently.
On December 29 of 2021, EUCI ran “After two years of belt-tightening, shale drillers’ capital budgets are set to rise in 2022”: “Even before the pandemic, shale operators had pulled back on drilling as they faced a backlash from shareholders and investors over their spending outrunning cash flow, leading to balance-sheet deficits across the industry.”
On January 6, the Center for Strategic and International Studies (CSIS) ran “What to Expect from Shale This Year” that looks at both the past mistakes and the current commitment to change of the U.S. shale business (links in the original omitted):
The first decade of the shale boom created jobs, delivered tax revenue to states and the federal government, and helped reduce the trade deficit — but destroyed investor capital on an unprecedented scale. Quarter after quarter, many shale companies reinvested all their cash flow as management teams were incentivized to seek growth rather than returns. The result was a lost decade for investors. According to one estimate, free cash flow for the entire U.S. shale sector for 2010–2019 was a stunning -$300 billion.
The oil price crash in 2020 was a turning point. Exploration and production companies were forced to cut their capital programs and lay down rigs, which decimated the oilfield services industry and left many workers out of a job. Crude oil production in the United States fell from a peak of nearly 13 million barrels per day (b/d) in November 2019 to average 11.3 million b/d in 2020 and 11 million b/d in the first 10 months of 2021. This contraction, painful as it was, created a more disciplined and resilient industry.
“Discipline” is the keyword in this CSIS article, as in capital discipline. The U.S. shale oil industry must assiduously avoid producing a glut of oil that floods the market again, (unless drillers want prices to go negative again). But writer Ben Cahill seems fairly positive about the prospects for shale oil in 2022. So, with a more prudent business model and a sounder mode of operation, shale oil might just take America back to the halcyon days of yore — energy independence.
That is, if the federal government will allow such a thing. The current regime may be happy with high prices for oil. The current regime may think high prices for gasoline and other fossil fuels will usher in some bright new future of alternative energy, like wind and solar. Such technologies ought to be developed, but they are not yet ready to replace fossil fuels.
Just as the oil business is getting its act together, the federal government may stymie its reorganization efforts. So get used to it, folks, high prices at the pump seem to be part of the plan.
However, the greenies and global warmists in D.C. may be outsmarting themselves, because Americans don’t like paying $100 to fill up their gas tanks, as is the case right now in parts of the country. And as for $100 for a barrel of WTI light sweet crude, the last time that happened was in 2014.
The market seems to be taking us back to the future as WTI has been trading for more than $90 this month. But hey, you don’t need to go anywhere — just “shelter in place” instead.