Commodities
Why do big companies refuse to produce more oil and gas production?
Major companies are refusing to produce more oil and gas production. The energy giants are still reeling from the recent collapse in oil prices and are unwilling to take risks.
Now that oil prices are much higher than $100/bbl, you can hear the question on every corner: why don’t the world’s energy giants take advantage of such a good opportunity and drill huge numbers of new wells to make billions on high prices?
The World Community is Asking OPEC to Produce More Oil
There are many reasons for this strange behavior, but analysts generally name three. Firstly, oil companies have not yet fully digested the trillion-dollar losses of the last decade. Second, expensive gasoline does not yet mean high profits for oil companies to justify the development of new fields.
And third, the growing popularity of electric vehicles makes most oil companies satisfied with the bird in the hand in the form of already developed wells, which now bring good profits; rather than chasing the crane in the sky, i.e., super profits, the hunt for which carries huge risks. Will Saudi Arabia produce more oil?
There is no definite answer. The first reason – the losses of the past years are mostly psychological in nature, but this does not make them any less strong. Because of the collapse in the oil markets in the middle of the last decade, oil companies lost over $1 trillion. For example, among the four oil giants covering all areas of the oil industry, from exploration of new fields to equipment and well maintenance: Royal Dutch Shell, Occidental Petroleum, Transocean and Halliburton, only one company – Shell – managed to make money rather than incur billions of dollars in losses in 2014-18.
It also answers the question of why Canada doesn’t produce more oil. The events of 2014-20 taught oil workers to be cautious and to always remember that high prices can collapse at any moment, and that a company that forgot about this and invested all its money in exploration and expansion of production is likely to go bankrupt.
Life has taught oil companies that it is safer to be conservative regarding costs, i.e. not to invest everything they have, no matter how much they might want to, in exploration and production. That’s why many oil companies have such low budgets for these items, despite the ideal market situation.
It might seem that you can forget about caution when prices are at, say, $120 per barrel, but the fact is that the oil markets are not ruled by arithmetic, but rather by higher mathematics.
For example, the oil markets are now in a situation described by the English word “backwardation,” when oil prices are currently higher than futures prices. In deciding whether to invest in new wells, an oil company director should analyze not the current oil prices. but the prices of the time when the first barrels of oil will be extracted from the new wells. If, for example, we are talking about the end of 2023, we can expect to be able to sell it for a maximum of $78 a barrel. That’s well below $97.5 a barrel on the spot market. Earlier, producers began to produce more oil as Iran’s supply fell.
If you add conservative thinking to backwardness, it becomes more or less clear why new wells are not growing like mushrooms after the rain and why oilmen and investors are in no hurry to “bury” big money in the ground.
Situation in the oil markets is slowly changing
Despite the above-mentioned reasons, the situation in the oil markets is slowly changing. The number of working rigs has now reached a two-year high, and in the next few months it may reach pre-pandemic levels.
Production is growing very slowly, but still. But it is not growing fast enough if there is a collapse in oil prices. This means that the cash flows that oil companies are generating at the moment should continue indefinitely until demand drops.
Contributing to oil companies’ reluctance to take risks and invest in new production are electric cars. Last year, one in 12 new cars sold was electric (8.6%). Data for the first six months of 2022 suggest that this figure could grow by about 50%.
Naturally, such rapid development of electric cars cannot help but get on the nerves, and confidence of oil companies. Few people want to increase production when they realize that the main consumer of oil, i.e. cars, is increasingly switching to electricity.
Investing.com — The outlook for prices in 2025 remains cautiously optimistic, influenced by a mix of global demand trends, supply-side constraints, and weather-driven uncertainties.
As per analysts at BofA Securities, U.S. Henry Hub prices are expected to average $3.33/MMBtu for the year, marking a rebound from the low levels seen throughout much of 2024.
Natural gas prices in 2024 were characterized by subdued trading, largely oscillating between $2 and $3/MMBtu, making it the weakest year since the pandemic-induced slump in 2020.
This price environment persisted despite record domestic demand, which averaged over 78 billion cubic feet per day (Bcf/d), buoyed by increases in power generation needs and continued industrial activity.
However, warm weather conditions during the 2023–24 winter suppressed residential and commercial heating demand, contributing to the overall price weakness.
Looking ahead, several factors are poised to tighten the natural gas market and elevate prices in 2025.
A key driver is the anticipated rise in liquefied natural gas (LNG) exports as new facilities, including the Plaquemines and Corpus Christi Stage 3 projects, come online.
These additions are expected to significantly boost U.S. feedgas demand, adding strain to domestic supply and lifting prices.
The ongoing growth in exports to Mexico via pipeline, which hit record levels in 2024, further underscores the international pull on U.S. gas.
On the domestic front, production constraints could play a pivotal role in shaping the price trajectory.
While U.S. dry gas production remains historically robust, averaging around 101 Bcf/d in 2024, capital discipline among exploration and production companies suggests a limited ability to rapidly scale output in response to higher prices.
Producers have strategically withheld volumes, awaiting a more favorable pricing environment. If supply fails to match the anticipated uptick in demand, analysts warn of potential upward repricing in the market.
Weather patterns remain a wildcard. Forecasts suggest that the 2024–25 winter could be 2°F colder than the previous year, potentially driving an additional 500 Bcf of seasonal demand.
However, should warmer-than-expected temperatures materialize, the opposite effect could dampen price gains. Historically, colder winters have correlated with significant price spikes, reflecting the market’s sensitivity to heating demand.
The structural shift in the U.S. power generation mix also supports a bullish case for natural gas. Ongoing retirements of coal-fired power plants, coupled with the rise of renewable energy, have entrenched natural gas as a critical bridge fuel.
Even as wind and solar capacity expand, natural gas is expected to fill gaps in generation during periods of low renewable output, further solidifying its role in the energy transition.
Investing.cm — Citi Research has simulated the effects of a hypothetical oil price surge to $120 per barrel, a scenario reflecting potential geopolitical tensions, particularly in the Middle East.
As per Citi, such a price hike would result in a major but temporary economic disruption, with global output losses peaking at around 0.4% relative to the baseline forecast.
While the impact diminishes over time as oil prices gradually normalize, the economic ripples are uneven across regions, flagging varying levels of resilience and policy responses.
The simulated price increase triggers a contraction in global economic output, primarily driven by higher energy costs reducing disposable incomes and corporate profit margins.
The global output loss, though substantial at the onset, is projected to stabilize between 0.3% and 0.4% before fading as oil prices return to baseline forecasts.
The United States shows a more muted immediate output loss compared to the Euro Area or China.
This disparity is partly attributed to the U.S.’s status as a leading oil producer, which cushions the domestic economy through wealth effects, such as stock market boosts from energy sector gains.
However, the U.S. advantage is short-lived; tighter monetary policies to counteract inflation lead to delayed negative impacts on output.
Headline inflation globally is expected to spike by approximately two percentage points, with the U.S. experiencing a slightly more pronounced increase.
The relatively lower taxation of energy products in the U.S. amplifies the pass-through of oil price shocks to consumers compared to Europe, where higher energy taxes buffer the direct impact.
Central bank responses diverge across regions. In the U.S., where inflation impacts are more acute, the Federal Reserve’s reaction function—based on the Taylor rule—leads to an initial tightening of monetary policy. This contrasts with more subdued policy changes in the Euro Area and China, where central banks are less aggressive in responding to the transient inflation spike.
Citi’s analysts frame this scenario within the context of ongoing geopolitical volatility, particularly in the Middle East. The model assumes a supply disruption of 2-3 million barrels per day over several months, underscoring the precariousness of energy markets to geopolitical shocks.
The report flags several broader implications. For policymakers, the challenge lies in balancing short-term inflation control with the need to cushion economic output.
For businesses and consumers, a price hike of this magnitude underscores the importance of energy cost management and diversification strategies.
Finally, the analysts cautions that the simulation’s results may understate risks if structural changes, such as the U.S.’s evolving role as an energy exporter, are not fully captured in the model.
While the simulation reflects a temporary shock, its findings reinforce the need for resilience in energy policies and monetary frameworks. Whether or not such a scenario materializes, Citi’s analysis provides a window into the complex interplay of economics, energy, and geopolitics in shaping global economic outcomes.
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