Drill Baby Drill? Maybe We Already Are: The Paradox of Falling Gas Prices and Record Oil Production
We have to drill baby drill? Or maybe we already are. With crude prices dropping, gas prices at the pump are following suit. Indeed, US gas prices hit a six-month low of $3.31 a gallon last week, down 50 cents from this point last year, according to AAA. By Thanksgiving, up to 40 states could be below $3 a gallon, according to our friends at Gasbuddy, Oh….is there a debate tonight? In the battleground states pump prices have seen big drops in Arizona (88 cents), Nevada (55 cents) and Georgia (49 cents) versus one year ago. US shale has been the largest source of non-OPEC supply growth over the past 15 years. Crude oil production in the United States, including condensate, averaged 12.9 million barrels per day in 2023, breaking the previous U.S. and global record of 12.3 million b/d, set in 2019. Average monthly U.S. crude oil production established a monthly record high in December 2023 at more than 13.3 million b/d. As Scotty said, “I’m giving it all she’s got Captain.” Isn’t it funny how economics work? The United States, Russia, and Saudi Arabia accounted for 40% (32.8 million b/d) of global oil production in 2023.
Independent producers develop 91 percent of the wells in the United States – producing 83 percent of America’s oil and 90 percent of America’s natural gas. Independents can be small family companies or publicly traded companies. It’s a fragmented association not easily lassoed by anyone. These companies will drill when it is profitable to do so. They won’t produce oil if global prices are too low. As much as consumers would love this to happen, no one has the power to jawbone prices down and make domestic production increase if it is not profitable to do so. Paradoxically, if prices drop, the US will indeed produce much less oil. We’ve already seen this during the initial wave of the pandemic in 2020. While we’re at it, implementing any kind of price controls for any goods will not ultimately become a panacea for the Jimmys and the Joes. There are two ways to allocate resources – price and scarcity. Doesn’t matter who you are, that’s it. Like the man said…the ultimate solution for high prices is…high prices. WTI erased all of its gains of the year and headed down into the $60/bbl range for the first time since the start of January, closing the week at $67.67. Brent crude futures finished the week at $71.06 a barrel, the lowest price since Dec. 2021. For the week, Brent declined 10%, while WTI dropped around 8%. Ouchy.
While people are enjoying their sesame bagel with cream cheese in New York tomorrow morning, Wall Street will have its hands full as the August CPI report will be released as the Fed meets next week to finally snip interest rates. Does Houston have good bagels? Italian food? Pizza? Asking for a friend. Last week, the S&P 500 dropped 4.3%, while the Nazzy Composite pooped 5.8%. What needs to be determined is if good news is bad news or bad news is good news. The reported jobless rate of 4.2% inferred a slowdown but not something to worry about. Translation = soft landing. Remember 4 years ago when all the smart people were so certain that we’d see a recession? It must have been hiding under the bed with the dust bunnies. Can’t find it. Maybe it’s just man brain.
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