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Here's the big reason why gasoline (and oil) prices may stay high

A survey by The Federal Reserve Bank of Dallas provides some insight

TEXAS, USA — Lately, we have been hearing that old cliché "pain at the pump" more times than we would probably care to. The phrase is sometimes overused…but it is also true. Prices have been painful, so when might we get relief for that pain at the pump? 

Keep an eye on oil. According to the American Petroleum Institute, at least 59% of the cost of gasoline comes from oil. Oil prices globally have been up by a lot.

What oil industry insiders are saying 

Producing more oil could help bring down its price, and thus possibly lower the price of gasoline. Will we see a significant increase in oil production? 

For six years, The Federal Reserve Bank of Dallas has been surveying many oil and gas producers, exploration firms, and oilfield services firms. In the most recent questionnaire, respondents said their costs to find and develop oil is at the highest point since the Federal Reserve Bank of Dallas started asking them.  

The Dallas Fed asked how much money the firms need to make per barrel to break even on an existing well or to drill a new well. 

There was a wide range of estimates for different drilling regions, but let's look at the averages: Across all the drilling areas, respondents said they need an average of 20-something to 30-something dollars per barrel to cover their operating costs on existing wells and 40-something to 60-something bucks a barrel for new wells to break even.  

Oil has been selling for a lot more than that. So, it’s not surprising that energy executives reported more activity in their businesses than in previous surveys. 

But why aren’t come of the companies expanding even more to meet surging demand? In the survey, some companies complain about shortages of equipment and available workers. 

Pressure that might prevent the production of a lot more oil... 

Many oil producers (and their investors) have been burned before when prices plummeted. Even though oil prices are high right now, The Dallas Fed reports that in its survey of energy industry executives the majority (59%), "Believe investor pressure to maintain capital discipline is the primary reason that publicly traded oil producers are restraining growth despite high oil prices". 

Indeed, not spending a lot of extra money to vastly increase capacity, while continuing to take advantage of high oil prices might lead to high profits and happy shareholders. But that would still leave the world thirsty for more oil. 

Expectations through 2022

The Dallas Fed asked producers by what percent they expect their crude oil production to change from the fourth quarter of 2021 to the fourth quarter of 2022. 

Half of the big companies responded that they either plan to not increase production at all or to just increase production slightly (0% to 5%). 

Smaller oil companies plan to increase production more aggressively by the end of 2022. 34% of them plan to ramp up production by 10% to 30%. And 23% of small producers plan to increase their oil production by more than 30%.

When they were all asked what they expect the price of oil to be by the end of the year, the average guess made by the oil producing executives was $93.26. That would be about 10% less than the $103.07 per barrel at the time they were surveyed. 

That wouldn’t be a tremendous decrease but might help to eventually drive down gasoline prices a little.

Texas still the epicenter of U.S. oil production

Last year, oil producers in Texas pulled 1,741,444,000 barrels of oil out of the ground. That was 43% of all the oil produced in the entire U.S. 

And the number of active drilling rigs in Texas has been going up steadily. That may create more production eventually, but doesn’t lower oil or gasoline prices immediately. 

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