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Production and Price Of Oil

Oil Production

Explaining why oil production doesn’t increase instantaneously as prices increase, it will take significant investment to generate more oil. Axios goes a good job of explaining why it is not an instantiations coloration.

U.S. oil prices rose 70% over the last year. Meanwhile, U.S. oil production rose by about 5%, Matt writes.

Why it matters: Domestic oil producers aren’t rushing to respond to soaring prices. In other words, don’t expect a flood of American crude to drive energy prices back down any time soon.

Why aren’t American oil companies — especially in the oil-rich shale patch — pumping like crazy to rake in even more dough?

It isn’t as easy as flipping a switch. To pump more oil, you have to increase spending on exploration, drilling and production — and that’s become costlier and more difficult because of supply chain issues and rising input costs.

Case in point: Frac sand.

In order to break the shale formations that contain oil and gas, drillers pump a high-pressure cocktail of water, sand and chemicals into wells. But sand is much more expensive, tougher to find and trickier to transport.

Canada Pacific Railway told investors at a conference last week that it “can’t move as much as frac sand as the demand is out there,” according to a transcript provided by FactSet.

Frac sand currently costs $40 to $45 per ton, up as much as 185% from last year, according to Rystad Energy analyst Ryan Hassler.

“The market is getting tighter in terms of availability, pricing is higher, and then even if you can source the sand, there are issues [such as] can you get the trucks to move it to where you need it?” William Janela, an analyst at Credit Suisse, tells Axios.

It’s not just sand. Other key inputs to drilling, like steel, labor and diesel fuel, are also rising in price, scarcity — or both.

The big picture: Several years back, when shale drillers were known for their speculative spending and drilling, the American oil industry might have been more than willing to boost production in the face of $100-plus oil.

But many of those companies went bankrupt during the early phase of the COVID crisis when oil prices collapsed.

The vibe of those that survived has switched from cowboy to corporate, with drillers now embracing the penny-pinching that Wall Street investors prefer.

The bottom line: There’s no indication that an investment boom is underway to significantly boost American oil production.

And even if there was a shale drilling boom, it would take six to nine months for additional barrels of American oil to hit the market and help lower prices, analysts estimate.

Axios Markets By Matt Phillips and Emily Peck ·Mar 22, 2022

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