Monday, June 17, 2024

Is there an upside for Louisiana with rising gas prices?

by BIZ Magazine

Typically, rising fuel prices mean more job growth in Louisiana, but that may not be the case for this recent historical spike.  

U.S. oil production hit an all-time high of nearly 13 million barrels per day (BPD) just two years ago. However, by May 2020, oil production had dropped to 9.7 million BPD. 

According to recent data from the Energy Information Administration (EIA), U.S. oil production is now at 11.6 million BPD. This shortfall is one factor that has led to increased gas prices over the past year. 

But why the hesitancy to drill?  

Slow rebound 

Of course, like most things, politics comes into play. The Biden Administration blames the oil industry. The oil industry says the Biden Administration has hostile policies. The bigger issues, however, are more complex than that.  

For one, some oil companies lost a lot of business during the pandemic- with some shutting down altogether. The United States had more than 800 operating rigs in 2019. In July 2020, there were only 172 rigs operating in the country.  

According to figures from the U.S. Bureau of Land Management, Louisiana active rig count, including offshore and onshore, has dropped to 45 in 2021. In 2014, there were 111 active rigs.  

David Dismukes, executive director and director of policy analysis at the LSU Center for Energy Studies, said the Bayou State has already lost more than 10,000 oil and gas jobs as a result of the pandemic. 

It takes time to recover from that type of hit.  

After COVID-19 restrictions lifted, supply chain issues, rising production and labor costs, and labor shortages hit every industry, including oil and gas, making it harder to ramp up production to reach what it once was.    

The number of rigs drilling has risen 60% over the past year and a half. Baker Hughes Co., an oil service company, reported that rig count was 519 during the week of March 4.  

This was up from 480 rigs the first week of 2022.  

While things are on the upswing, it can take years for a rig to be set up and producing, if it even produces at all.  

And then there is the matter of DUCs — “drilled but uncompleted” wells. Oil companies have the permits and funds to finish them, so they will cap them and then go back and complete the project when they are unable to secure new permits, which is not currently the case.  

According to the Bureau of Land Management, more than 9,000 drilling permits had been issued at the end of 2021, some from Trump’s tenure and more than 3,500 from Biden’s.  

That outpaced the Trump administration’s first-year total of 2,658. 

According to the EIA, there were around 8,800 DUC wells in the summer of 2020. Now, there are around 4,400, because oil companies are working to finish these.  

The EIA reported in January that the number of DUCs has been on a constant and steady decline. 

“A company will bring these online since the marginal cost of doing so is far less than the marginal cost of drilling a new well, regardless of whether there are permits in hand,” Dismukes said. “Depleting DUC inventory can be a cost effective way of bringing incremental production online at a relatively lower cost – thus, we have seen a pretty significant deterioration in DUC counts since producers have been preferring to finish out these wells rather than drill new ones.” 

Cautiously optimistic 

Oil companies lost nearly 80 billion in 2020, but they reported record profits for 2021. This type of up and down isn’t new for the oil and gas industry. 

This leaves oil companies cautious about oil prices and how to proceed, especially because the wells they drill today may not have output for a year or more. By that time, the price of oil may have plummeted.  

To understand this caution, one just needs to look at what happened in the last three years.  

According to the EIA, the U.S. was a net exporter of petroleum in 2019 and supply outpaced demand. In 2021, as the pandemic restrictions lifted and the economy boomed, demand rose faster than the supply.  

Now, with a ban on Russian oil imports, supply is even more strained as the global market increases prices on oil.  

“Profits are, in part, a function of commodity prices – when prices are down, holding other things constant, profits can also go down if costs are not falling as fast,” Dismukes said. “Right now, the oil and gas companies are making profits, and using those to pay off debt, buy back shares to increase the value of remaining shares to shareholders and maintain or grow dividend payments to shareholders to enhance stock attractiveness and lower overall cost of capital for producers.” 

Oil and gas provide a lot to the Bayou State 

According to a 2020 economic impact report from the Louisiana Oil and Gas Industry, oil and gas provided $73 billion to the state GDP and supported 249,800 jobs in 2019. 

The industry accounted for nearly $4.5 billion of state and local tax revenue that year, which represents 14.6 percent of total state taxes, licenses and fees collected.  

The jobs supported by the industry generated $14.5 billion in wages to in-state workers. 

While all of this is positive, the last two years have drastically changed the economy of the nation and the state. 

Higher gas prices lead to bigger issues 

Just a year ago, a gallon of regular gas cost around $2.50 cents in Louisiana.   

As of March 24, the national average for regular gas was $4.236 and the average for Louisiana was $4.038, according to AAA.   

Caddo Parish Commissioner Lyndon Johnson said that when gas prices skyrocket, people start changing the way they do things.  

“People will go to other means of transportation like public transit or carpooling. Daily routes will be planned. Some gas guzzlers will be parked or traded for a more economical vehicle,” he said. “Those quality-of-life products will be jeopardized.” 

Dismukes agreed.  

“In the short run, [consumers] cut back on discretionary travel and use public transportation, ride share, or simply drive less – over time, individuals will look to purchase more efficient vehicles or switch to alt fuel vehicles like electricity or natural gas,” he said.  

Johnson, who has nearly three decades of expertise in the oil and gas field, with over 20 in a supervisory position, said that supply from oil companies “will steadily increase, at least through the summer months into fall, but not at the same rate as demand.” 

“I believe there will be relief by the end of 2022, but before the end of the year, we have summer, and increased gas prices are common during those months,” he said. “You have to remember, we were in a pandemic and people were limited in movement. NATO decided to cut back on oil and gas production during the pandemic and now people are driving more, causing the rise in demand and optical shortage.  People will factor the gas prices into their vacation budget and hit the roads. They will cut some form of entertainment, dining, hotel, or shopping out of the equation.” 

Demand destruction and stagflation 

Some experts are forecasting the likelihood of recession.  

Goldman Sachs analysts are predicting a 35% risk of recession in 2022, up from just 10% a year ago, and U.S. Labor Secretary Marty Walsh recently said that a recession is “a real likelihood.”  

Billionaire investor and DoubleLine Capital CEO Jeff Gundlach recently warned that rising oil and gas prices could lead to recession and stagflation, an economic phenomenon that couples low growth and high inflation. 

“Historically, oil shocks have led to demand destruction that causes recessions. We’re going to start hearing the word stagflation a lot more,” Gundlach said in a recent interview with Magnifi Media. 

His warning may not be far off. “Demand destruction” is where consumers and businesses reduce spending because of the higher prices of commodities.  

Higher gas prices will impact and hurt low-income consumers the most. Gas costs make up about 3.6% of income for Americans earning less than $30,000 a year, a Labor Department survey shows. 

“For one, gas makes up a larger share of their total spending. For another, lower-income consumers tend to work in sectors where remote working is not an option (e.g. leisure and hospitality), and so their driving demand is inelastic to gas prices,” Bank of America analysts recently wrote in a note to clients. 

Studies have shown that, in the U.S., rising oil prices reduce economic activity and we may be stuck with these higher prices for a while, still.  

“Futures markets are saying that we’ll probably see high prices for the balance of the year, but next year, we should start to return to levels closer to where we were before these crises arose,” Dismukes said. “I think we’ve topped out as high as we can for now. There are some preliminary signs now that consumers are starting to cut back on gasoline purchases and if high prices continue, the demand destruction will sow the seeds of a price correction to the downside.” 

So, what’s the answer?  

No immediate relief 

Unfortunately, there is no immediate relief to be had. Supply cannot increase much faster than it already is, and demand for other goods may decrease to help off-set the price of gas well before the supply is available to fully meet demand.  

Signs of that can already be seen. According to the University of Michigan’s consumer sentiment index released March 11, confidence fell 5% to 59.7 from 62.8 in February, with the index of future economic conditions dropping to 54.4. That is 31.7% lower than a year ago. 

Consumers are still spending, though, but at a slower rate, according to a Commerce Department report that came out March 16.  

Advance retail sales grew 0.3% for the month, below the 0.4% Dow Jones estimate.  

All other major industries- except the oil and gas sector- also saw slight decreases in sales, or stagnant numbers.  

Sales at gas stations were up 5.3% in February and saw a 36.4% from a year ago. Prices at the pump rose about 7% in February alone, according to the Energy Information Administration. 

“Clearly, a lot of the signals you’d typically see for a recession are out there- high energy prices, increasing interest rates, inverted yield curve. However, the US economy still exhibits very strong signs of activity and the labor market continues to be strong,” Dismukes said. “So, for now, it’s hard to say we are heading into a recession, maybe some levels of stagnation, but that’s speculative as well. Regardless, let’s say there are some warning lights flashing out there that deserve attention.”

— Angel Allbring, BIZ. Magazine

Update Required Flash plugin