Oil markets have been plagued with uncertainty over the past few months even though the price of oil has settled below $100 per barrel for the first time in two weeks.
With the rising cost of fuel at the pump in the United States and Europe and the significant increase in global oil prices, many are left wondering if U.S. oil companies will be increasing domestic oil production to help keep costs low for American consumers.
For one reason or another, President Joe Biden has not been able to increase the supply of domestic oil despite several failed attempts. It seems rather strange that U.S. oil production has dipped. The refineries are struggling to keep up with the demand for gasoline on the nation’s roads and use it in cars, trucks, watercraft, and other machinery.
The price of oil should have encouraged U.S. oil companies to buy more land, drill new wells, and increase production. However, 29% of U.S. oil executives were not motivated by price and did not consider it as a motivating factor, according to a survey by the Federal Reserve Bank of Dallas.
Why isn’t the US Increasing Oil Production?
While the United States has the capacity to increase oil production relatively quickly, higher input costs, additional labor, and equipment are the major deterrents.
Prices of crude oil and gasoline in the US have been making significant jumps since 2017, with prices of both reaching new highs in March of this year. The rise in prices was prompted by additional input costs, and the cost of oil hitting a record high.
The cost of gas and oil in the US has stayed close to $100 for the past few months, with a brief spike in March that reached just $130 per barrel.
After a sharp drop in April, the input costs index hit another new record high. Oil exploration and production companies in the U.S. recorded a jump in input costs, lease operating expenses, and other expenses as well.
When the oil industry can bring significant amounts of new production online, there will be a six to nine months lag between high prices and that.
US oil executives have been reluctant to ramp up production since the government has not yet implemented plans to build out infrastructure that would increase the country’s oil exports, and prices are uncertain.
The lag between U.S. oil production and its ability to export oil is also a concern for many big-time US companies. For U.S. oil production to increase, prices would need to be higher for longer.
Demand remains constant. One way of bringing prices down is to increase the supply. There is a lot of oil underneath North America and off the coast. Even if we decided to start drilling today, it would take us a while to get any oil out of the ground and into the refinery.
It is natural to wonder why oil companies based in the United States are not putting more oil on the market and helping the American consumer who could be taking advantage of lower prices with the high supply.
For most of U.S. oil companies, they have no magic switch to turn on oil production overnight, making it difficult for the U.S. to increase production any time soon.