More oil is on the way

President Biden spent much of 2022 encouraging US and foreign energy suppliers to produce more oil and natural gas. He finally gets what he wants—though not exactly where he expected.

A new analysis from consulting firm Wood Mackenzie shows that worldwide fossil fuel discoveries will reach their highest level in more than a decade in 2022. The company measures new energy discoveries in terms of “value creation,” which combines the efficiency of new energy discoveries with the amount of energy discovered. The value created in 2022 totals $33 billion, assuming oil sells for $60 a barrel. If the price of oil increases, its value will increase.

The value of new oil and gas discoveries in 2019, the last year before the Covid pandemic, was $22 billion. Exploration rose slightly in 2020, but fell in 2021 due to falling energy prices and intense pressure from energy companies to cut costs. The discoveries of 2022 are worth almost 6 times the discoveries of 2021.

In addition, the 2022 discoveries include many “higher-quality hydrocarbons,” according to WoodMac’s analysis, which require new infrastructure and lower energy costs to extract, and therefore generate fewer overall carbon emissions than was typical in the past decade.

The most valuable new discovery is in the waters near Namibia, at the southwestern tip of Africa. Other important findings are in Algeria, Guyana and Brazil. France’s Total Energy has the highest value, followed by Brazilian and Qatari state companies, Petrobras and Qatar Energy. The only American company in the top 10 was ExxonMobil (XOM), which ranked 9th.

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“The oil and gas sector has been through its biggest reset in years as low oil prices have forced them to cut costs and sharpen portfolios,” said Julie Wilson, director of global exploration research at Wood Mackenzie. “They’re only drilling the best prospects, what they think is the lowest cost and lowest carbon reserves. That means the oil and gas found in 2022 has a better chance of progressing to development than creating less value.” It has in the past.

It may take several years for newly discovered energy reserves to reach global markets, as fields must be developed and final arrangements between drillers, governments and other parties are finalized. But the resurgence of oil and gas exploration is a return to normalcy for an industry that has been battered in recent years by overproduction that has eroded profits, followed by massive losses during the Covid pandemic. At the same time, global warming caused by carbon emissions is driving a shift toward green energy, increasing pressure on fossil fuel companies to conserve cash rather than expand.

The sharp rise in oil and natural gas prices in 2022 has revealed an alarming gap between the well-intentioned goal of reducing carbon emissions and the need for fossil fuels that still power the bulk of the global economy. U.S. gasoline prices hit $5 a gallon last June, the highest they’ve ever been, creating an acute political problem for President Biden and other world leaders. Natural gas levels also rose, pushing winter heating costs to levels that are still painful.

Russia’s invasion of Ukraine and subsequent sanctions against Russia, a major energy producer, added to the fossil fuel supply crisis. But fundamental factors actually set the stage. Oil and gas companies largely overspent and overproduced in the decade before the Covid pandemic, which kept prices paid by consumers low but ruined returns for energy shareholders. Declining demand during Covid spread pain across the industry. From 2015 to 2021, more than 600 US oil and gas companies filed for bankruptcy.

Will activists reduce oil production? A student from Camoes School stands next to posters reading “End Fossil Fuels” as a protest for climate change and against the use of fossil fuels in Lisbon, Portugal, November 14, 2022. Reuters/Pedro Nunes

Biden ran for president in 2020 on a promise to end fossil fuels. But he began urging oil companies to drill more as gas prices approach $4 a gallon and then $5 in 2022. However, US energy companies are private sector businesses that do not take orders from the government, as nationalized oil companies do in many Middle Eastern countries. Most US energy companies are already resisting large capacity additions, well aware that more energy production usually drives down prices and sometimes turns booms into busts. Biden asked Saudi Arabia and other foreign producers to do more drilling, which was not satisfactory.

Market forces now appear to be convincing energy companies that there is money to be made through prudent development. Despite the shift to green energy, global demand for oil is still likely to grow, not decline, through 2030, according to research firm Energy Intelligence. Demand for natural gas could peak even later, as gas is the cleanest fossil fuel and plays a key role as a primary energy source even with the widespread adoption of renewables like wind and solar.

US energy companies are also gradually increasing their production. In its latest forecast, the US Energy Information Administration expects US oil production to reach 12.4 million bpd in 2023, slightly above the record high of 12.3 million bpd in 2019. The EIA thinks US production will reach 12.8 million barrels per day. in 2024. It’s not the oil Biden is hoping for, but it’s a significant increase given that drillers face headwinds like labor shortages and material inflation in addition to activist opposition.

The International Energy Agency expects a very small increase in global oil supply this year, which can be outpaced by increased demand. Whether the price of retail products such as gasoline or heating fuel increases depends on two things. The first is Russia. U.S. and European sanctions on Russian energy supplies will be tightened again in February, which could cut global supplies of refined products such as diesel fuel. The goal of these sanctions is to reduce Russia’s energy income without harming global resources, but the methods are new and there could be plenty of room for error.

Another factor is the resilience of the Chinese economy. Strict lockdowns caused by Covid-19 have limited China’s economy for most of 2022, and since China is a big energy consumer, this has helped dampen global energy demand. This is one of the important factors of energy price reduction in the second half of 2022. But China has ended these quarantines and the economy there seems to be ready to recover. Rising energy demand in China will raise energy prices everywhere.

Overall, the supply of oil and natural gas appears to be lower in the next few years than it was pre-Covid. “The market likes to see a supply cushion,” says Wilson. But we have to get used to a future where we don’t have excess capacity. “We will probably continue to see fluctuations in oil prices.” This means that every bit of new production, from anywhere, will be welcomed.

Rick Newman is a senior columnist for the Yahoo Finance. Follow him on Twitter @rickjewman

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