Things are not looking so good in the Middle East as I sit here today. Efforts to force a peace process have shown limited promise, and it’s almost sure to get worse before it gets better. And of course tension in the Middle East creates tension in the market for oil. Prices jump and bump at every new bit of information flowing in from halfway around the world. But even though the situation in the Middle East remains uncertain, Texas oil companies aren’t rushing out to fire up the rigs.
There’s an old saying I’m sure you’ve heard: once bitten, twice shy. Seems like it even found its way into a hit song not too long ago. It can be applied to all sorts of situations, but it basically deals with lessons learned. What’s going on in the energy sector reminds me of that saying, even though I hesitate to use the term “shy” in connection with an industry so full of risk-taking, high-rolling characters.
Here’s the situation. We’re sitting on plentiful supplies of oil, and our nascent economic recovery has yet to show consistent signs of picking up a lot of steam. As the largest consumer of oil on the planet, the economic health of the US is vital to sustaining demand. Until it’s clear the slowdown is history, producers are going to continue to sit back and watch. They’ve been bitten in the past, and they’re somewhat shy.
About 20 years ago, we were coming off the peak of the Oil Boom (generally known outside of Texas as the Energy Crisis) and oil prices were approaching $40 per barrel. About 10 years ago, there was a spike at one point during the Gulf War when they actually broke the $40 per barrel mark. Today’s $20-$25 per barrel price is nowhere near these levels. Although we’ve seen prices edge up, it’s still not a huge increase by historical standards. Moreover, there’s every reason to believe some of the price pressure is temporary.
Natural gas is a different story. Because it’s not something we can easily import, it’s not affected by political tensions to the degree oil is. Currently, drilling for natural gas is picking up as we work off the leftovers from heavy production over the past couple of years and a mild winter. Many existing wells are nearing depletion, and gas prices are up significantly. So there has been some increase in natural gas drilling activity, but it’s a relatively mild upswing at this point.
I, for one, am glad to see this somewhat cautious response. A look back at the roller coaster ride the industry has taken is all it takes to feel relief at the current slow-and-steady, wait-and-see, look-before-you-leap mentality. The time isn’t right for a rush to drill, drill, drill. If peace breaks out in the Middle East, we’ll see oil prices take a significant (although, in my opinion, only temporary) tumble. We don’t want a huge buildup that only makes sense at today’s prices, because tomorrow may see them off by 20% (or more). Better to sit tight and wait.