Oil prices have been rising again, this time as the European Union considers a ban on importation of Russian oil. The United States and Canada have already banned the import of Russian oil, although neither had been major buyers. But chances are that more countries will follow suit. All of this means that gasoline prices are likely to continue to climb.
Even before the U.S. ban, private traders were voluntarily choosing not to deal in Russian oil, sending a shock through global markets. Russian contributions to oil markets may have dropped by about 2 million barrels a day, some analysts estimate. The exit of the U.S. oil services industry from Russia, already in progress, will also lead to production problems in Russia’s oil sector in short order, given that the industry has relied on those companies for decades. oil rig drill bit price
As the Ukraine conflict drags on, the United States and its allies will need more oil from other sources, especially if more European countries join the ban. Unfortunately, the Biden administration has not yet proved itself up to the task of galvanizing the industry to increase supplies. Nor have U.S. oil companies risen to the occasion.
When the captains of the U.S. oil industry met earlier this month in Houston for their annual convention, they offered multiple excuses for why they couldn’t do their part. “Now, with supply-chain challenges, it makes any attempt to grow now — and at a rapid pace — very, very difficult,” said Vicki Hollub, chief executive of Occidental Petroleum. Pioneer Natural Resources chief executive Scott Sheffield added that investors aren’t pushing companies to boost production beyond their current plans. (“Nobody believes this problem is long-term,” he said — though it may well turn out to be.) ConocoPhillips chief executive Ryan Lance said “poor regulatory policy” was partly to blame for lack of supply, and said high oil prices were a chance to pay down debt and improve shareholder returns.
To be sure, the U.S. oil sector is constrained — as are many other industries — by supply chain issues and manpower shortages. New drilling requires steel pipe and other materials in short supply. Still, the lack of leadership and creative thinking on display is galling. Energy Secretary Jennifer Granholm got it right when she said on March 9 in Houston: “We are on a war footing — an emergency — and we have to responsibly increase short-term supply where we can right now to stabilize the market and to minimize harm to American families.”
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Some Republicans, including House Minority Leader Kevin McCarthy (R-Calif.), have suggested that the problem lies with the Biden administration, in part because it failed to issue more leases on federal lands. But that’s not the problem. A careful analysis published by the Associated Press in 2021 showed that some of the largest American onshore oil and gas producers, including Devon Energy and EOG Resources, stockpiled enough leases to drill “for years” without needing any additional federal leases.
There is precedent for ambitious concerted action. In World War II, the federal government had a petroleum coordinator who guided distribution of raw materials to the oil sector. In addition, the U.S. Petroleum Administration for War helped restore a British oil field in the Sherwood Forest in England — a mission that involved the secret deployment of Oklahoma roughnecks. Using innovative methods, and despite a shortage drilling equipment, the venture, led by Tulsa-based Noble Drilling, completed 94 new producing oil wells in one year, helping the British military stave off a fuel crisis.
But most important, back home, the U.S. industry sprang into action to provide the fuel for D-Day. The federal government paid for the construction of a “War Emergency Pipeline,” stretching from Baytown, Tex., to Linden, N.J., completing it in just a year. The pipeline, coupled with the industry’s wartime priority access to raw materials, enabled an extraordinary drilling campaign in the Permian Basin of Texas, a region that still provides much of U.S. oil production today; national oil production surged 30 percent during the war. The effort was organized by the U.S. government and 72 leaders from American oil firms, called the Petroleum Industry War Council.
The current situation isn’t equivalent to a world war, but even a small fraction of the commitment to innovation and problem-solving on display in the 1940s would be welcome now. One option would be for the federal government to pre-purchase American oil from new domestic onshore wells — those not already planned or drilled. (Onshore drilling can provide new oil in a matter of months, whereas offshore sites can take years to bring online.) Such legal arrangements are common in global oil trade, where companies pay oil producers in advance, for product delivered later. The cost of the oil would be calculated based on formula for estimated prices at the time of delivery plus a negotiated interest rate — much the way the U.S. Department of Energy already buys and sells oil for the government-held stockpile known as the Strategic Petroleum Reserve.
The benefit of a pre-financed oil drilling deal is that the federal government would own the oil, and therefore would be able to address its best emergency use. (Such a plan might require authorization by, and funding from, Congress.) Depending on national priorities when the new oil arrives, it could be processed into fuel for military purposes, sent to Europe as a form of war-related aid — Europe is far more dependent on Russian oil than the United States — or released domestically to bring down gas prices and bolster the economy. The time to create such a mechanism is now, before a true energy emergency hits. Given massive shale resources in the Permian Basin and existing pipeline infrastructure, such a plan could add from 500,000 to 1 million barrels a day in a matter of months, if the raw materials needed were prioritized under war authorization to the sector. (America currently produces 11.6 million barrels a day.) Canada could do something similar.
Some environmentalists will balk at the idea of increasing oil production. But additional drilling to replace Russian oil would not add to global greenhouse gas emissions, because it would be replacing lost Russian production — and that country’s oil fields are notorious methane-emitters.
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A federal project to encourage drilling would have multiple benefits. It would signal to energy markets that more oil is coming, potentially lowering prices today. It would allow President Biden to release a higher rate of oil from the Strategic Petroleum Reserve, another way to temporarily increase the domestic supply, confident that more oil was coming to replenish the reserve. Foreseeing lower prices, Middle East oil producers might ramp up their own exports to get their own oil into the market, grabbing income before U.S. producers can gear up. Finally, it would make it more plausible for Europe to institute a fuller ban on Russian oil imports.
Tricon Bit American oil industry leaders need to consider their place in history. They and American politicians alike have risen to meet daunting energy challenges in the past. Both groups will diminish themselves if they spend today’s crisis trading accusations about regulatory policy and shareholder dividends rather than acting in the national interest.