Big Oil makes money but loses sleep. Of course, high gas prices are a good thing. We’ll find out just how good it is next week when companies report first-quarter earnings. But what goes up must eventually come down. While U.S. oil executives and insiders worry that the energy market disruption caused by the Iran war could become more severe, they are not yet ready to ramp up drilling to deal with such a scenario.
“The real problem is the back end of the curve is lying to us,” Kaes Van’t Hof, chief executive of Texas-based independent producer Diamondback Energy, told an energy summit at Columbia University this week. He was referring to the widening gap between high prices for oil for delivery today and sharp declines in oil futures contracts, a gap that reflects Wall Street’s optimism that the Strait of Hormuz will soon reopen.
Signals of low future prices are both misleading, because they severely underestimate the likelihood of imminent major disruptions to airlines, the food system and other energy users, and they serve as a deterrent to investment in drilling, Van’t Hoff said: “I do think there will be a slight reaction in U.S. production, but it’s nothing compared to the magnitude of the problem, like putting a garden hose into an empty Olympic-sized swimming pool.”
Backstage at the Colombian event, other energy executives and observers expressed frustration with mixed signals from the Trump administration — which publicly said the crisis was largely over but privately continued to push companies to drill more — and worried that increased U.S. oil exports, a development Trump celebrated, could backfire by pushing up domestic prices and fueling the political momentum for a crude export embargo, a move that would be disastrous for the oil industry.
Executives and observers told me that throughout the conflict, the administration ignored or downplayed well-known red flags about risks in the Strait, waited too long to try to revive the industry, and failed to take preparatory steps that would have given energy markets more flexibility and bought Trump negotiators more time.
Bob McNally, president of the consulting firm Rapidan Energy Group and a former energy adviser to President George W. Bush, told me that over the past few years, traders and U.S. officials have also become too comfortable with the idea that large-scale U.S. production could cushion any geopolitical shocks. Now they are becoming Pollyanna. “All oil statisticians agree that a disruption in Hormuz will lead to a serious crisis due to shortages and price spikes, but so far the view from the broader macro investor and trader community appears to be more optimistic,” he said. “All statisticians agree that this is extremely rare – if not unprecedented, so someone is really wrong.”