Rising oil production in the US is driving down prices and increasing climate fears

The American oil fields are flowing again.

Just three years after U.S. oil production collapsed during the pandemic, energy companies are producing a record 13.2 million barrels per day, more than Russia or Saudi Arabia. Oil flows have grown by about 800,000 barrels per day since the start of 2022, and analysts expect the sector to add another 500,000 barrels per day next year.

The increase in production has helped drive down gasoline prices, which have fallen nearly $2 per gallon since the summer of 2022 and are now back to 2021 levels. It has also given the Biden administration significant leverage in its dealings with oil-exporting foes like Russia, Venezuela and Iran, while reducing the need to persuade friendly countries like Saudi Arabia to moderate prices.

But the comeback of American oil production also entails major risks. Greater supply and lower prices could boost demand for fossil fuels at a time when world leaders meeting in Dubai are pushing to reach deals that would accelerate the fight against climate change. Most scientists say the world is far from achieving the goals needed to prevent the catastrophic effects of global warming, which is caused mainly by the burning of fossil fuels such as oil, natural gas and coal.

“We achieve energy security and reduce inflation by tapping into carbon-intensive, high-emissions oil production,” said Amy Myers Jaffe, director of the Energy, Climate Justice and Sustainability Lab at New York University. “We will have to address that conflict.”

The United States now exports roughly four million barrels a day, more than any member of the Organization of the Petroleum Exporting Countries except Saudi Arabia. On balance, the United States still imports more than it exports because domestic demand exceeds supply and many U.S. refiners can refine the heavier oil produced in Canada and Latin America more easily than the lighter crude produced from the shale fields of New Mexico, North America, seeps. Dakota and Texas.

Nearly every additional barrel of U.S. crude produced is exported, mainly to Europe and Asia, where supplies are tight. Moreover, natural gas bubbling up with oil has also led to record gas exports and helped lower prices for that fuel and for electricity, much of which is produced in gas-fired power plants in the United States.

The surge in U.S. production has helped end the energy crisis that gripped Europe after Russia’s invasion of Ukraine in February 2022 — at least for now. European countries have replaced much of the gas they bought from Russia with gas from the United States, Qatar and other exporters. They have also reduced their use of natural gas, a phenomenon helped by last year’s mild winter.

“There is a foreign policy dividend in keeping oil prices under control,” said David Goldwyn, a leading energy diplomat in the Obama administration.

Not so long ago, the American oil industry was in serious trouble. Since 2015, the sector has experienced repeated crises, culminating in a collapse in prices during the pandemic. Investors fled. Exxon Mobil was knocked out of the Dow Jones industrial average, and some European oil companies announced plans to accelerate their transition from fossil fuels to renewables.

As concerns about climate change grow, Joe Biden pledged during his 2020 campaign to stop drilling on federal lands and federal waters offshore. He also pledged to accelerate the transition to renewable energy and electric cars to drastically reduce emissions responsible for climate change.

But as president, Mr. Biden has chosen a very different course. While he has supported green energy and battery-powered cars, he has also pushed oil companies to increase production in an effort to lower prices for consumers. He has approved a major drilling project in Alaska over the objections of environmentalists and a small number of offshore oil and gas permits.

Mr. Biden is under pressure from some Democrats to tout gains in oil production as a way to reach voters wary of high gas prices. He hasn’t done that yet, but his government hasn’t complained about production either.

White House National Security Council spokesman John Kirby said the administration is committed to keeping energy prices low.

“The President will continue to focus, as he always has, on a healthy, well-balanced global market that can continue to drive down the price of gasoline here in the United States,” Mr. Kirby said.

The pandemic took a heavy toll on U.S. oil production, which fell from 13 million barrels per day at the end of 2019 to just over 11 million barrels per day a year later. Dozens of oil companies went bankrupt and the number of oil rigs in use fell from 800 to 350 in 2020 as tens of thousands of field workers lost their jobs.

Most of the new U.S. oil production comes from the Permian Basin, which straddles Texas and New Mexico. There are also some new projects and expansions in Alaska and offshore in the Gulf of Mexico.

“It’s the mother of all comeback stories,” said Robert McNally, a senior energy adviser under President George W. Bush. “The past few years have shown that you should never bet against the US oil sector.”

The bonanza has helped American consumers. This week, the average price for a gallon of regular gasoline was $3.25 per gallon, 25 cents lower than what it cost a year earlier and nearly $1.80 lower than the record price set in June 2022, according to AAA.

The U.S. oil industry is now dominated by hydraulic fracturing of shale, a process that splits hard rock using pressurized water and chemicals. Shale wells are only highly productive for a few years, so a decrease in drilling leads to a rapid, sharp drop in production. Conversely, a rapid return to drilling will increase production.

Technological advances have allowed producers to drill faster with new rigs designed for the shale fields of Texas, New Mexico, Colorado and North Dakota. Robotics and software improvements have reduced costs, while lateral wells have been extended to expose more rock for fracture.

But price is what drives investment and production. After the Russian invasion of Ukraine, oil prices rose above $100 per barrel.

The largest companies such as Exxon Mobil and Chevron decided not to significantly increase drilling for fear of a price drop. Instead, the companies spent billions of dollars buying back stock and paying dividends.

However, in late 2022, smaller public companies and hundreds of private companies began to ramp up their activities. Many small businesses were bought by larger companies, which also stimulated production.

“Independent stocks were back close to pre-pandemic activity,” said Raoul LeBlanc, vice president at S&P Global Commodity Insights. “And the soldiers just went crazy.”

Mr LeBlanc said the investments made in the second half of last year are now paying off. He predicted that U.S. production could rise to 13.7 million barrels per day by the end of 2024 unless there is a deep recession and prices fall below $65 a barrel, about $10 lower than current prices.

“I’m very surprised by how much we produced this year,” said Scott Sheffield, CEO of Pioneer Natural Resources, a major producer in the Permian Basin that is being acquired by Exxon Mobil. He predicted that the country could produce 15 million barrels per day in five years.

Production is also growing in Canada, Guyana, Brazil and Norway.

Mr. Sheffield said “the big question” is how Saudi Arabia might respond if production continues to rise in the United States and other countries.

As leader of OPEC Plus, a group of 23 oil-producing countries that together produce nearly half the world’s oil, Saudi Arabia could pressure its allies to maintain production levels, as it did in 2014. instead of lowering them to keep prices down. and cripple rising U.S. shale production. That decision set off years of price swings that soured many Wall Street investors on the oil industry.

Investors have become more interested in oil lately, and shares of Exxon, Chevron and other companies have risen sharply in the past two years. But that could change. Oil prices have fallen recently and have fallen by more than 15 percent since the summer.

Mr Sheffield said drastic swings in energy prices were one of the main reasons why investors were wary of his sector. “The reason for the lack of interest from investors is the volatility of our business,” he said. “Discipline is not out of the question, but we have to solve this volatility problem and I don’t know when we’re going to solve it.”

Jim Tankersley contributed reporting from Dubai, United Arab Emirates.