Mar 22, 2022 - Economy

Why U.S. oil producers aren’t jumping to fill the world’s energy void

Data: FactSet; Chart: Baidi Wang/Axios
Data: FactSet; Chart: Baidi Wang/Axios

U.S. oil prices rose 70% over the last year. Meanwhile, U.S. oil production rose by just 6%.

Why it matters: Domestic oil producers aren't rushing to respond to soaring prices. In other words, don't expect a flood of American crude to drive energy prices back down any time soon.

Why aren't American oil producers — especially in the oil-rich shale patch — pumping like crazy to rake in even more dough?

  • It isn't as easy as flipping a switch. To pump more oil, energy companies have to increase spending on exploration, drilling and production — and that's gotten costlier and more difficult because of supply-chain issues and rising input costs.

Case in point: Frac sand.

  • In order to break the shale formations that contain oil and gas, drillers pump a high-pressure cocktail of water, sand and chemicals into wells. But sand has suddenly gotten much more expensive, tougher to find and trickier to transport.
  • Canada Pacific Railway told investors at a conference last week that it "can't move as much as frac sand as the demand is out there," according to a transcript provided by FactSet.
  • Frac sand currently costs between $40 and $45 per ton, up as much as 185% from last year, according to Rystad Energy analyst Ryan Hassler.

"The market is getting tighter in terms of availability, pricing is higher, and then even if you can source the sand, there are issues [such as] can you get the trucks to move it to where you need it?" William Janela, analyst at Credit Suisse, tells Axios.

It's not just sand. Other key inputs to drilling are also rising in price, scarcity — or both.

  • Steel: Casings made of steel are inserted into the drilled holes, and cemented in place, to keep holes from collapsing and keep the oil out of the surrounding water table. Prices for these products are rising.
  • Labor: The "roughnecks" who run rigs that drill holes have gotten much tougher to find, as the national unemployment rate hovers below 4%.
  • Diesel: You need oil to drill oil. Trucks provide the power to the pumping systems that drive the high pressure mixture into the holes. The trucks run on diesel — which is at record highs.

The big picture: Several years back, when shale drillers were known for their speculative spending and drilling, the American oil industry might have been more than willing to boost production in the face of $100-plus oil.

  • But many of those companies went bankrupt during the early phase of the COVID crisis, when oil prices collapsed.
  • The vibe of those that survived has switched from cowboy to corporate, with drillers now embracing the penny-pinching that Wall Street investors prefer.

The bottom line: There's no indication that an investment boom is underway to significantly boost American oil production in response to the emerging energy price shock.

  • The most closely watched leading indicator — the rig count number from energy services firm Baker Hughes — has been rising quite slowly, and remains well below the levels that prevailed before the pandemic.
  • Even if there was a shale drilling boom, it would take six to nine months for additional barrels of American oil to hit the market and help lower prices, analysts estimate.

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