The European Union (EU) has announced a partial embargo on Russian oil in response to the invasion of Ukraine. By yearend, about 90% of Russian oil import volumes could be affected. It's a major blow to Moscow, which relies on oil and natural gas sales for economic sustainability.
The number of oil and natural gas drilling permits issued by the Texas Railroad Commission reached an all-time high in March, at over 1,100. Hundreds of companies of all sizes are jumping into the fray. Activity is picking up across the state, with the Permian Basin reportedly seeing over 900 horizontal permits.
Recently, there has been much focus on the "petrodollar" and whether it will continue as the currency of choice in the oil market. China and Saudi Arabia have discussed shifting away from it, a move that some worry will end the dollar's dominance in world markets; others seem to think it would be the end of life as know it. Let me put your mind at ease.
Gasoline prices have soared, topping $4 per gallon in most areas. The increase has been rapid, and with inflation in almost everything else in family budgets, the additional costs are difficult to absorb. They are also very visible; we see the signs constantly.
Oil prices are touching an altitude not seen since the spike in summer 2008, pushing gasoline prices into uncharted territory and raising other costs in their wake. The situation in Ukraine and efforts by financial markets to predict it are driving the immediate spurt in prices, but even before Russia invaded, prices were trending upward as the global economy rebounded from COVID-19 and demand rose faster than supply.
Oil prices have regularly closed above $80 per barrel of late, something that hadn't happened since 2014. They've more than doubled in the past year and are a far cry from the doldrums of last spring. High oil prices ripple through the economy. More than half of the cost of gasoline is directly determined by oil prices, and most manufacturing and distribution involves some use of derivative fuels. Consumers are paying higher prices both directly at the pump and indirectly through other products.
The energy sector remains a key driver of the Texas economy. It dominates state exports; drilling, production, transportation, and processing activity involve substantial investments; and the massive supply chain has been entrenched and expanding for over a century. Although the Texas economy is diverse and multifaceted, oil and gas and related activity from exploration through shipping comprise about 13-14% of overall business activity.
Among the myriad industries affected by the COVID-19 pandemic is one particularly critical to Texas: oil! As much of the global economy shut down to slow the spread of the virus this spring, fuel demand plummeted. Prices plunged, with futures contracts even briefly going negative. The industry initiated a rapid shutdown of drilling activity, which rippled through an enormous supply chain and supporting retail and service enterprises in the affected communities and the entire state. Many service firms and large swaths of production and reserves changed hands, as capital resources for small and mid-sized firms became virtually nonexistent.
Oil production costs are down sharply in Texas in recent years, but they are not yet at a level to maintain viability given current prices and uncertainty. As a result, significant disruptions in oil production areas are occurring. The industry initiated a rapid shutdown of drilling activity, which rippled through an enormous supply chain and supporting retail and service enterprises in the affected communities and the entire state. Banks with large energy loan portfolios are being strained, and mid-stream and downstream investments are being deferred. Although concentrated in a few areas, the fallout permeates all regions of Texas.
Oil markets are in turmoil. In January, oil prices were trending in the upper $50s per barrel. Now, spot prices are a fraction of that level and futures prices actually went decidedly negative for the first time in history for certain contracts as they neared maturity. Traders scrambled to avoid taking delivery of oil they didn't want or have any place to store.