(The Epoch Times)—The war in Iran, which continues to trap about one-fifth of the world’s oil supply in the Persian Gulf, is seen by many as a golden opportunity for American oil companies to expand their position as the world’s leading energy producers.
“We’re seeing a combination of trying to reopen the Strait [of Hormuz] while simultaneously recognizing that there are going to be alternative routes to get oil and gas to market, including expanding production in new places and expanding production in the United States,” Caleb Jasso, policy expert at the Institute for Energy Research, told The Epoch Times. “The world as a whole is really reevaluating global energy supply chains and the need for a greater level of diversification.”
Thus far, however, America’s oil industry has remained cautious, holding off on major new investments and focusing instead on increasing output from existing wells. The combined number of oil and gas rigs operating in the United States declined from more than 700 in May 2023 to 558 today, according to Baker Hughes, an industry analytics firm. And while the oil rig count has increased from 410 at the beginning of this year to 429 as of May 29, most producers remain reluctant to pour significant money into new wells.
“Operators are getting more barrels out of the rigs they already have through longer laterals—some wells now exceed three miles horizontally—better completion designs, simul-frac and trimul-frac operations [developing multiple wells in a single fracking operation], and AI-driven targeting,” Jason Isaac, CEO of the American Energy Institute, told The Epoch Times. “That efficiency curve is the only reason production is holding near records while the rig count keeps drifting lower.”
Why Oil Companies Are Holding Off
What is holding up major new investments is a combination of uncertainty about oil prices, a history of costly overproduction in a chronically boom-and-bust industry, and lingering fears that a changing of the guard in Washington could resurrect the Biden administration’s anti-fossil-fuel policies.
“Oil companies are hesitant to make such big investments over what may be a temporary price spike,” Paul Mueller, senior research fellow at the American Institute for Economic Research, told The Epoch Times. “Their decision is further complicated by the risk that future administrations will penalize the industry through aggressive taxation or suffocating regulations.”
In addition, massive losses and bankruptcies that followed the last investment binge are still fresh in the minds of oil executives.
“The memory of 2014 through 2020—when the industry destroyed something like $300 billion in shareholder capital chasing growth—is still the dominant gravitational force in boardrooms today,” Isaac said.
“Wall Street will not reward production growth right now; it will reward dividends, buybacks, and debt paydown,” he said. “That is the deal investors demanded after the last cycle, and management teams who break it will pay for it in their stock price.”
For all their hesitation to invest, however, U.S. oil companies are still producing at record levels, with output rising from about 5 million barrels of oil per day in 2010 to nearly 14 million barrels today, largely due to fracking technology.
Isaac calls this “a strategic gift to the country” and “the single biggest reason this Hormuz crisis has not produced $200 oil and gasoline lines.”
Prices for West Texas Intermediate light crude, which hit a peak above $112 per barrel in April, have since fallen back to $88 per barrel. And yet, U.S. oil production has crept up by only about 2.4 percent over a year ago and is essentially flat since the start of the Iran war, according to Energy Information Agency data.
“It’s not that the expansion isn’t taking place on paper or not being discussed,” Jasso said. “It’s wanting to make sure that the timing is right, and that is a very complicated thing to try to calculate, given that there is a very high unpredictability of when the Strait of Hormuz is going to have regular energy flow again.”
“Because of how much the Strait influences the price of energy, you have oil majors who are essentially waiting for the right opportunity to do what everyone is predicting that they will do, which is to expand product.”
Declining Output
Despite the latest announcement of a potential ceasefire between Iran and the United States, price uncertainty remains high. And even if prices stabilize, several barriers to new investment remain. One of them is the fact that among America’s existing oil reserves, “the best rock has been picked,” Isaac said.
He estimates that the majority of the prime acreage in the Permian basin, which according to the Energy Information Administration accounts for 44 percent of total U.S. oil production and 19 percent of U.S. natural gas production, has already been drilled, leaving less than four years of premium inventory left there, at current rates.
“New wells in Tier-2 and Tier-3 acreage do not produce like the early Wolfcamp barnburners did, and estimated ultimate recovery on Bakken and Permian wells has reportedly fallen by half since 2020,” Isaac said.
Wolfcamp has been by far the most productive segment of the Permian basin, which is located on the border of Texas and New Mexico. It accounts for more than half of the Permian basin’s output. The Bakken oil wells are in the north, spanning North Dakota, Montana. and Canada.
Another impediment that producers are facing is shortages of labor and crews, having let many go during the pandemic when demand collapsed, Isaac said. And then there are distribution bottlenecks once the product is removed from the ground. When drilling for oil using fracking technology, natural gas is a byproduct, but producers are still waiting on pipelines to move it.
“Permian natural gas takeaway has been constrained for the better part of a year, with new pipelines not coming on until late 2026 and others not until 2028,” Isaac said. “Associated gas growth from oil drilling has to go somewhere, and when it cannot, operators flare it, pay buyers to take it, or curtail the oil well producing it.”
As it stands, the cost of disposing of natural gas is significantly reducing the profitability of fracking.
“This is not just an inconvenience for the gas side of the business—it is directly suppressing oil economics, because in the Permian, gas is a co-product of oil production,” Isaac said. “Every barrel of new Permian crude the country wants brings more associated gas with it, and until takeaway catches up, the math gets worse before it gets better.”
In addition to distribution bottlenecks, America suffers from an aging refinery infrastructure, which was built to process heavy crude from places such as Venezuela, while fracking produces light crude that must often be exported to be refined elsewhere. Currently, about 80 percent of the oil produced in the Lower 48 states is light crude, which oil companies routinely ship out to European refineries.
Global Leader or ‘Oil-free Future’?
Analysts say that one thing public officials can do to boost domestic energy output is to ease regulatory bottlenecks.
“For increasing production domestically, it’s definitely a question of regulatory reform, especially with permitting questions,” Jasso said.
And while the Trump administration has been an advocate of greater oil and gas production, many regulations are at the state level. California, once America’s largest oil-producing state, has been actively working to “forge an oil-free future,” with policies including emissions caps, oil well buffer zones, and so-called green accounting laws.
California’s strict environmental laws, together with the state’s unique fuel blend requirements and higher compliance costs, led oil companies—Phillips 66 and Valero—to shutter their refineries in the state over the past year. This is estimated to remove more than 17 percent of the state’s refining capacity from the market.
