Gas prices in the U.S. keep going up and up, and Washington’s Democrats have found a convenient scapegoat for the pain inflicted on American drivers — Big Oil.
President Joe Biden says oil companies “shouldn’t pad their profits” while crude oil prices fall. Meanwhile, Democrats are pushing for a windfall tax on oil profits, and industry CEOs may face a grilling in Congress next month.
But halfway around the U.S., the Democratic governor of an important oil-producing state has a different message: Oil companies might have good reason to be wary of amping up production.
“I have had several informal discussions and many of them tell me they’re not planning on changing their plans. What they need for that is a couple of things,” Colorado Governor Jared Polis said in a new Yahoo Finance Presents interview.
First, oil companies need long-term price stability. If a company moves now, it could lose out if prices drop before new oil actually starts flowing. It “could be in six months, it could be in a year,” Polis says of the lag each company has to factor in.
The price of oil has indeed been highly volatile in recent years. When many Americans briefly drove less at the onset of the pandemic in 2020, the over-supply briefly turned oil prices negative. That shook up the industry and led to pullbacks on production we still feel today.
Even this week, the price of crude oil collapsed and entered bear market territory days after record highs.
Aside from price volatility, capital markets could be stopping oil companies from changing course.
“There was a bubble of debt that drove oil and gas production a couple years ago and they’re still on the other side of the pendulum,” Polis says. Right now, he added, “They’re not interested in debt finance and expansion.”
A company like Exxon (XOM) surely remembers investing over the last decade and then posting a net annual loss of $22.4 billion for 2020, the largest in its history.
The oil giant survived but many smaller companies failed. In a recent oil bankruptcy report, the Texas law firm Haynes and Boone documented more than 600 industry bankruptcies from 2015 through 2021.
Oil companies have plenty of opportunity to drill — including in Colorado, Polis says. “It’s not about permitting; it’s about deployment of capital,” he says.
Some Republican lawmakers, he warned, are “almost echoing Socialist Party lines saying we should order them to do it or make them do it, sort of a centralized command economy.”
‘Is this something that we can count on?’
As of Friday, Americans pay $4.27 for a gallon of gas, near recent highs even as the price of crude oil fell. Colorado — the fifth highest producer of crude oil in the U.S. as of last November — is a bit below average with prices at $3.96 a gallon.
Politicians across Washington are focusing on the high prices, blaming both “Putin’s price hike” and supposed oil company profiteering. One liberal group proclaimed the companies “Price Gouge Consumers After Record-Smashing Year” in a release on Friday.
For his part, in lieu of trying to pressure oil companies, Polis has handled inflation differently and focused on measures to alleviate prices for his constituents such as cutting government taxes and fees. He favors suspending the federal gas tax, which would knock off 18.4 cents a gallon on gas prices; he aims to provide his constituents with additional relief by cutting state gas taxes.
Beyond that, it might be a waiting game.
“Look, if prices stay where they are now, there’s no question domestic production will step up. But I think what a lot of producers want to see is, ‘Is this just a spike in the market?’ or ‘Is this something that we can count on by the time we get rigs in the ground?’” Polis says.
Ben Werschkul is a writer and producer for Yahoo Finance in Washington, DC. Rick Newman contributed reporting.
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Source: https://finance.yahoo.com/news/democratic-governor-warns-against-echoing-socialist-party-lines-and-forcing-big-oil-to-drill-130622783.html