Fed economist: Ability to ramp up production is extremely limited

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Calls continue for oil companies to produce more oil to help cut energy prices. Those calls have now joined by calls for refiners to not only produce more gasoline but to cut prices. Among those seeking to educate the public on just how oil markets work are economists in the Federal Reserve banking system.

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Asked by Swartzwelder – with tongue in cheek – why oil companies are “being the bad guys” in refusing to lower prices, Golding stressed that oil companies do not set oil prices, gasoline prices or diesel prices. Those are commodities, he said, that are traded globally thousands of times a day.

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“When it comes to companies producing more to lower prices, two things won’t happen,” he said. “One is we’re already growing production. We anticipate US production will grow by 700,000 barrels a day between the end of 2021 and the end of 2022, the most growth from any producing country in those 12 months. The question is how much more can they do?”

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That means the ability to increase production is extremely limited, he said, and not just by shareholders wanting more returns from public companies. Second, Golding said, the industry has been hampered for over a year now by the inability to hire people or obtain equipment, which frequently has been backordered for six to 12 months.

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“That’s not enough to ramp up much beyond current plans,” he said. “We won’t know what 2023 will look like for companies unto the end of the year. The paradigm of single-digit growth is here to stay. It’s not a function of shareholders and producing profits but how many rigs they can get out there and how many people are qualified to run them. That answer doesn’t show up in the news every day or in political soundbites.”

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Golding, who was with the strategic planning department at Pioneer Natural Resources before joining the Fed, also countered criticism that operators are holding 9,000 drilling permits on federal leases that they aren’t using.

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“If you look out over the last four or five years, the number of permits issued and the number of wells drilled using those permits is roughly 50 percent,” he said. “Companies have permits to have optionality on their leases and don’t fully know what they own at the moment but it’s important to have those permits because they last two years and operators can keep extending them if they think it’s an area they want to get into.”

The other piece of the equation is that between 2,000 and 3,000 wells are drilled on federal onshore lands anyway, he said.

“To be very generous and say 5,000 permits are ready to be drilled, it would take a few years to get through that on top of all the logistical and labor issues we’re talking about. In a lot of ways, the 9,000 drilling permits thing is borderline irrelevant because they’re working through the inventory of permits they have and are doing so as fat as they can.”

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