There is tension and fundamental misunderstanding in the oil market
There is a fundamental tension in the oil market.
Governments and consumers are used to the idea of $60 oil. For them, it feels like the “right” price of oil. But oil companies and oil-dependent countries cannot thrive (and in many cases survive) with $60 worth of oil.
This is a mismatch that needs to be resolved and it won’t be easy. OPEC+ cut quotas today by 100,000 barrels per day. The White House has now just said it is determined to take every step necessary to shore up energy supplies.
It’s easy to blame OPEC, but the biggest hole in global oil production compared to 2019 comes from the United States. Private producers don’t pump that much. A new era of capitalist discipline has replaced a “drills, baby, dig” mentality in which shareholders punish companies for unnecessary spending rather than returns on capital.
The root of the issue is cheap money and unrealistic promises by the oil companies. During the shale revolution, they promised profitability as cheap as $20 oil, and Wall Street responded by throwing nearly unlimited amounts of money into drilling. Basically subsidizing energy consumers for a decade.
this is the account.
The problem is that governments and consumers don’t realize it and are thinking about $60 oil will And the should counting. But at the end of the day, it’s the producers and companies that hold all the cards. OPEC in particular has a big role to play. If you take their comments at face value, they need to ensure minimum prices at levels that stimulate sufficient production to prevent a surge. A year ago I would have thought it was $70-$80, but this year we’ve seen those levels and there’s not nearly enough digging. That’s because investors and companies are worried about an eventual downturn in the oil industry. ESG has scared investment.
Now I think the level needed to stimulate production is +100$, but that would require a huge transfer of wealth from consumers to oil producers and no one is ready for that trade-off. So governments are fighting it…and every passing day is delaying much-needed investments. The irony is that this could eventually lead to oil prices rising more than $100.