The US would be less vulnerable to surging oil prices if Wall Street shareholders were less parsimonious. Energy executives delivered a surprise at an industry gathering in Texas that coincided with a spike in Brent crude to $139 a barrel. They lashed out at their investors.
Since the pandemic, independent drillers have cut back on exploration spending. They began spouting previously unfamiliar terms such as “free cash flow”, “buybacks” and “dividends”. This was to appease credit and equity investors who for years had eaten heavy losses pursued in the name of market share gains.
But with a ban on Russian oil exports mooted by the US, oil company chief executives want to step up to fill the void. That would require shareholders to loosen the purse strings and allow bosses to allocate more cash flow to capital expenditure.
Drilling and activating more wells would take time. That means there is an urgent need for a shift in US energy policies. The tight discipline instilled by the oil price slump of 2015 looks like an anachronism when oil is trading at more than $120 a barrel and the west is prioritising energy security.
Two years ago, just prior to the pandemic, the US was producing 13mn barrels a day according to the US Department of Energy. The figure by the end of February 2022 was under 12m barrels daily. A wave of bankruptcies and shotgun mergers shook up the capital allocation priorities of shale drillers. Most have, remarkably, committed to put half or more of cash flow towards shareholder payouts.
The US exploration and production sector is not a cartel. Any company could choose to defect from de facto production ceilings in an echo of low-cost airlines raising capacity. Shareholder primacy has dictated that the will of the investor class trumps all other considerations. Pressure from the Biden administration is needed to brake price rises at the pump and reduce Vladimir Putin’s negotiating leverage.
The Lex team is interested in hearing more from readers. What should US frackers do? Please tell us what you think in the comments section below.
