With oil prices soaring and American companies slow-walking production increases, some energy analysts have begun suggesting that politically noxious government incentives — like subsidies for oil companies — could be needed to bring supply back in line with demand.
Why it matters: The Russian energy shock, amid broad inflation, leaves political leaders — at least those hoping to stay in power in democracies — with a series of ugly to nightmarish policy options.
Driving the news: Energy prices continued to surge Tuesday, after the E.U. moved a step closer to banning imports of Russian crude.
- U.S. crude prices rose to nearly $120 a barrel in early trading before easing back. Average gasoline prices appear poised to surpass the recent record high of $4.62 a gallon.
The big picture: Russia is the world's second-largest exporter of crude oil, and the largest exporter of natural gas. Sanctions levied in response to its invasion of Ukraine upended energy markets, supercharged prices and triggered a rush to secure supplies.
- In theory: The U.S. — the world's largest crude oil producer — has the reserves, wealth and technical know-how to boost production, offsetting some of the Russia shock's impact on inflation.
- In practice: Unlike other energy superpowers — Saudi Arabia and Russia, for instance — the U.S. relies on a system of laws and market incentives to coax companies to pump more. U.S. leaders can't just pick up the phone and order a couple million extra barrels of production per day.
The intrigue: Though oil prices are up more than 70% over the last year, American producers have been slow to respond. Weekly domestic production is up roughly 7% over the same span, and it remains 8% below where it ended 2019.
What's happening: Analysts cite a few key reasons that drills are idle.
- Inflation: Costs for drilling materials and labor are all up sharply and in some case difficult to find.
- Uncertainty: It wasn't that long ago — during the worst of the COVID-related lockdowns — that oil prices went negative. Now they're at some of the highest levels on record. Such wild swings equal massive uncertainty for executives contemplating billions in spending to boost production in coming years. They're largely taking a pass.
- Giant profits: Shareholders have pushed CEOs to opt for near-term profitability over risky bets on future production. Right now high prices are generating massive profits.
- Climate: With climate issues making a lower-carbon future likely, oil companies are seeing little reason to make major long-term investments.
What's next: Some analysts are starting to game out what could be done to boost production and help bring down energy prices in the coming years.
- "To do so quickly in an environment in which oil and gas investors are actively discouraging production growth would require a shift to a New Deal-like approach to energy policy," wrote analysts with J.P. Morgan in a recent report.
- "With an unprecedented investment in U.S. exploration and production along with a significant relaxation in regulations the U.S. Federal Government could potentially encourage U.S. producers to grow crude oil output at a rate of more than 2 million barrels per day, per year starting in 2024," they wrote.
Our thought bubble: Pledging to spend billions of taxpayer money — J.P. Morgan ballparks the cost of such a New Deal-style response at $400 billion — to subsidize already massively profitable energy companies would be political suicide.
- It would also fly in the face of efforts to decarbonize the economy.
- Far likelier options in the U.S. include subsidies to consumers to allow them to keep buying — or penalties like windfall taxes on oil companies for keeping prices high.
The bottom line: With the green energy transition still off in the hazy future and a growing list of giant oil producers like Russia, Iran and Venezuela whose supplies are off-limits, politicians throughout the West need credible plans to address energy costs over the next few years — and fast — if they want to stay in power.
