President Joe Biden has lately sought to soothe fears that rising inflation could hurt the U.S. recovery and undermine his $4-trillion spending plans. This comes after U.S. inflation for the month of June accelerated to the fastest clip since 2008, as the economy continues to recover following the Covid-19 related lockdowns. According to the Labor Department, the consumer price index (CPI) climbed 5.4% Y/Y in the month of June. That’s about twice the average rate over the past decade. Biden has something else to worry about: Rising oil prices.
The administration will feel a little jittery about high oil and gasoline prices because of the risk they pose to Democrats’ future political ambitions. It’s a well-known fact that gas prices have an outsized impact on the consumer psyche. Gas prices currently sit at $3.18 per gallon nationally, a full dollar higher than prices last year.
Indeed, this is not lost on Republicans, who have seized the moment and blame Biden for rising gas prices.
Investors should, however, worry about rising oil prices not only because of the role that oil has historically played in dictating inflation trends but also because Wall Street is no longer enthusiastic about oil and gas stocks–which could, ironically, lead to even higher inflation.
Related: Uganda’s Oil Boom Is Only Just BeginningOil prices and inflation are connected in a cause-and-effect relationship. As oil prices climb, inflation tends to follow in the same direction higher. On the other hand, inflation tends to fall in tandem with falling oil prices. That’s the case because oil is a major input in the economy, and if input costs rise, so should the cost of end products.
Falling Oil Investments
Though less frequently discussed seriously compared to Peak Oil Demand, Peak Oil Supply remains a distinct possibility over the next couple of years, mainly due to serious underinvestments in oil and gas.
In the past, supply-side “peak oil” theories mostly turned out to be wrong mainly because their proponents invariably underestimated the enormity of yet-to-be-discovered resources. In more recent years, demand-side “peak oil” theory has always managed to overestimate the ability of renewable energy sources and electric vehicles to displace fossil fuels.
Then, of course, few could have foretold the explosive growth of U.S. shale that added 13 million barrels per day to global supply from just 1-2 million b/d in the space of just a decade.
It’s ironic that the shale crisis is likely to be responsible for triggering Peak Oil Supply.
In an excellent op/ed, vice chairman of IHS Markit Dan Yergin observes that it’s almost inevitable that shale output will go in reverse and decline thanks to drastic cutbacks in investment and only later recover at a slow pace. Shale oil wells decline at an exceptionally fast clip and therefore require constant drilling to replenish the lost supply.
Indeed, Norway-based energy consultancy Rystad Energy recently warned that Big Oil could see its proven reserves run out in less than 15 years, thanks to produced volumes not being fully replaced with new discoveries.
According to Rystad, proven oil and gas reserves by the so-called Big Oil companies, namely ExxonMobil, BP Plc. (NYSE:BP), Shell (NYSE:RDS.A), Chevron (NYSE:CVX), Total (NYSE:TOT), and Eni S.p.A (NYSE:E) are all falling, as produced volumes are not being fully replaced with new discoveries.
Source: Oil and Gas Journal
Last year alone, massive impairment charges saw Big Oil’s proven reserves drop by 13 billion boe, good for ~15% of its stock levels in the ground, last year. Rystad now says that the remaining reserves are set to run out in less than 15 years unless Big Oil makes more commercial discoveries quickly.
The main culprit: Rapidly shrinking exploration investments.
Global oil and gas companies cut their capex by a staggering 34% in 2020 in response to shrinking demand and investors growing weary of persistently poor returns by the sector.
The trend shows no signs of moderating: First quarter discoveries totaled 1.2 billion boe, the lowest in 7 years with successful wildcats only yielding modest-sized finds as per Rystad.