There’s a Boom in the Oil Sector, and Here’s Why

While everyone is talking about the energy transition, the American oil industry is swimming in money. Never has it extracted so much crude from the shale in the Texas subsoil.

Horizontal drilling and fracking have been unprofitable for years, but oil is no longer in the red: Oil companies are making big money, and the United States is the world’s largest producer. Shares of Exxon Mobil, Diamondback Energy and other companies are at or near record highs.

The price has gone up

The sector’s post-pandemic recovery is largely driven by market forces, but Russia’s war in Ukraine is also a factor. In the United States, oil has averaged about $80 a barrel since the start of 2021. It was about $53 since 1997.

Such high prices and demand suggest that the shift to green energy and electric cars will be longer and more complicated than environmentalists and some world leaders had hoped.

It’s not just price. Under pressure from Wall Street to deliver better financial returns, oil companies that survived the lean years stopped borrowing heavily to finance shale oil development. They cut expenses and costs by cutting staff and automating operations.

Since 2021, oil and gas wells in the lower 48 states have generated more than $485 billion in free cash flow (the money left over after operating expenses and new projects), estimates Rystad Energy, a research and advisory firm. In the 2010s, the industry spent $140 billion more than it took in.

No more drunk sailors

“We used to be called drunken sailors,” said Steve Pruett, CEO of oil and gas producer Elevation Resources of Midland, Texas, an industry hub in the Permian Basin. “I’m hopeful that’s not our reputation anymore.”

Curiously, the financial success of American oil companies is politically orphaned: neither President Joe Biden nor former President Donald Trump talk about it.

As Joe Biden advocates fighting climate change, he has been quiet about the renewed prosperity that oil brings. But his campaign takes credit for lowering gasoline prices after they spiked in 2022 when the Russians invaded Ukraine.

Mr. Trump portrays the oil industry as a victim that only he can save, so he says nothing about its successes. He promises, if elected, to axe Mr. Biden’s climate initiatives and encourage oil companies to drill everywhere… which could depress prices and profits.

The environmental consequences of the oil boom are mixed. Producing and burning oil releases greenhouse gases that warm the planet. But more expensive oil makes cleaner energy more attractive, says Samantha Gross, a senior fellow at the Brookings Institution, a nonpartisan research group.

“The abandonment of oil will not be caused by a drying up of supply, by a shortage,” predicts Mr.^me Gross. There are masses of them. It is the demand that will decrease.

It’s not going to happen tomorrow. Oil is a smaller share of the global energy mix than it was before the pandemic, partly because of the rise of electric vehicles. But demand for oil continues to climb. It hit a record high of more than 100 million barrels per day in 2023, up 2.6% from 2022, according to the Statistical Review of World Energy.

From Texas to New Mexico

The Permian Basin is buried beneath a vast desert covered in oil derricks and cacti that stretches from west Texas to eastern New Mexico. It supplies 6.4 million barrels of crude a day, nearly half of all U.S. production.

Here, the cycle of good years and bad years is part of life, with the economy evolving according to the price of crude oil.

When oil is $80 a barrel, hotels are full, highways are clogged with trucks and the unemployment rate is low: 2.4% in May in the Midland region (4.1% nationally in June).

According to federal estimates, production in the region is expected to increase by 8% this year compared to 2023.

“We’re going to be drilling like this for another 40 years,” predicts Kyle Hammond, CEO of Permian Deep Rock Oil Co., a small operator that is drilling dozens of horizontal fracking wells beneath the city of Midland.

Massive sound barriers protect surrounding neighborhoods from the noise of a generator and the beep of backing trucks.

Many oil companies are betting big on the Permian Basin. Exxon, the region’s largest producer, aims to increase its oil and gas output there by about 50% by the end of 2027. “That’s a reflection of demand,” said Bart Cahir, who heads Exxon’s shale division.

It’s hard, hard to be a subcontractor

However, the budgetary discipline and automation of the big oil companies weigh on the profitability of their many subcontractors.

At the end of 2018, companies were operating about 490 drilling rigs in the Permian Basin and pumping 4 million barrels of oil a day, according to federal data. Today, they are producing more than 6 million barrels from about 310 rigs.

This hurts the wallets of drilling contractors and companies that house workers who shift work in the oil fields.

“It’s not like the old days when companies were opening checkbooks and not watching the bill; it’s more relaxed,” says John Odette, director of Crew Support Services, which operates a dozen mobile home complexes in the Permian Basin, with a sigh. Its occupancy rate is 85%, but rates are much lower than they were before the pandemic, Odette says. A room that cost $100 a night in 2018 now fetches $50 to $80.

Too much natural gas, not enough pipelines

While the price is high enough for everyone to make money on oil in the region, it’s not all rosy with natural gas: there’s so much of it here that at times, there’s no place to put it. Pipelines aren’t always enough to get it to markets where demand is high.

For several days this month, the price of natural gas in West Texas was negative. That means that instead of getting paid for the fuel, producers had to pay other companies to take it.

The sluggish prices are generating some frustration in the industry with President Joe Biden, who this year suspended approvals for new natural gas export terminals. A judge this month ordered the Biden administration to lift the suspension, but analysts say that doesn’t make much difference in the short term. Even if everything goes smoothly, planning, permitting and building a terminal takes years.

“We desperately need these terminals now to create a market for the gas,” said Suzie Boyd, a Midland-based consultant who helps producers sell their oil and gas.

Within the industry, the presidential campaign is creating some anxiety about the future. The vast majority of oilmen are Republicans, but some acknowledge that their industry is often better off with a Democrat in the White House. Democrats tend to impose stricter regulations, which limit production and keep prices higher than in a more laissez-faire environment.

Whatever the outcome of the November election, the future of the oil industry depends on a larger question: What will happen to global demand?

The International Energy Agency, a multilateral organization based in Paris, expects global oil demand to peak before the end of the decade as more people and businesses buy electric cars and rely on wind and solar power. But many oil executives and the Organization of the Petroleum Exporting Countries (OPEC) say consumption will rise through 2030 and beyond.

This article was published in the New York Times.

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