There’s More to the Story of Higher Gas Prices
• 2 min read
- Brief: Alternative Investments
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Geopolitical events, national-security concerns, inflation upticks and climate action are creating challenging pricing dynamics in energy markets worldwide. Everyone has noticed higher prices at gas pumps since Russia invaded Ukraine, but that’s only part of the story.
Even before the invasion and subsequent sanctions, U.S. government policy decisions to boost clean-energy production were pushing up prices for carbon-based energy (oil, natural gas, coal). But the Ukraine conflict is exacerbating the problem, particularly in Europe, which relies on sanctioned Russian oil and natural gas.
Historically, from a U.S. perspective, rising energy prices encouraged exploration and drilling in North America as oil producers sought to boost output. In early 2009, in the aftermath of the great financial crisis, West Texas Intermediate oil futures prices (WTI) hit $42 a barrel, but rapidly began increasing, reaching $70 a barrel by July 2009. In response, North American drilling rig counts went from under 200 to over 1,400 by mid-2012, which ultimately softened prices.
But this time a distinctly different pattern is emerging. WTI dropped below $20 in April 2020 as COVID-19 spread globally. Rig counts subsequently fell to under 120. As economies gradually reopened, oil futures prices recovered and WTI was over $75 at year-end 2021. The Ukraine war has since pushed oil prices over $120, fostering national-security concerns about energy supplies, but rig counts have only increased to 660 as of mid-March. Why? Several factors are at work:
- Cost escalations in labor, steel, fracking sand and other key inputs have made drilling in some areas uneconomic even with high oil prices.
- Energy producers are still recovering from overleveraged balance sheets, a result of overinvestment in 2013 and 2014 and seem hesitant to make new capital allocations.
- Policy measures targeting climate action have increased regulatory costs and limited drilling in some areas.
- Efforts to reduce carbon emissions have created social pressures discouraging carbon-based energy production.
The current European challenges demonstrate the importance of energy independence. However, pushing to increase clean energy while sacrificing carbon-based energy over the near term is fraught with issues. A managed transition makes sense to stabilize costs. There are numerous ways the United States can achieve an effective transition: open more public lands to new drilling, allow for continued development of natural-gas power plants, revisit nuclear energy use and accelerate green-energy conversion.
Investors should examine all those areas for opportunities as America moves toward finding true energy independence and a cleaner, safer, healthier world.
This information is for general information use only. It is not tailored to any specific situation, is not intended to be investment, tax, financial, legal, or other advice and should not be relied on as such. AMG’s opinions are subject to change without notice, and this report may not be updated to reflect changes in opinion. Forecasts, estimates, and certain other information contained herein are based on proprietary research and should not be considered investment advice or a recommendation to buy, sell or hold any particular security, strategy, or investment product.
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