The fallout from the Russian invasion of the Ukraine in energy markets this week in the form of sharply higher crude oil prices points to the need for an immediate supply solution to the potential loss of crude oil from Russia. Crude oil prices continue to climb, and gasoline prices are moving into all-time record territory with no sign of relief in sight.
Karr Ingham, Petroleum Economist for the Texas Alliance of Energy Producers, says there are very few possibilities for significant near-term production growth, and the only viable option appears to be the United States, led by Texas and the Permian Basin. “If not here, where? There are no great options for production growth in 2022 outside the United States,” said Ingham.
OPEC may have neither the willingness nor the ability to meaningfully increase production, including Saudi Arabia, the world’s third largest producing country behind the United States and Russia, said Ingham. That leaves the United States, the world’s top producer, as the best and perhaps only hope to help fill the supply gap. That effort would clearly be led by Texas and the Permian Basin, he said.
U.S. and North American supply growth has been challenged in the current domestic political environment with deliberate efforts to slow production on federal property, the cancellation of the Keystone XL pipeline, growing hostility toward domestic U.S. oil and gas production in the Administration and Congress, and increasing roadblocks to development in several U.S. states.
That makes Texas the sweet spot for near-term supply growth, says Ingham. “We have little in the way of federal production, and the state remains generally industry-friendly and open to development,” he said. “Texas and the Permian Basin specifically provide not just the best, but the only viable possibility for production growth.”
Crude oil production in the United States remains about 1.3 million barrels below its late 2019 peak of just under 13 million barrels per day. If that production were replaced, prices for crude oil would clearly be lower than they are now, and returning to that level as quickly as possible is paramount to easing unrest about energy prices in the U.S. and quelling global concerns about reduced supplies from Russia.
Additionally, said Ingham, Texas and the Permian Basin are major players not just in the U.S. domestic production scenario but are of global significance. Were the Permian Basin its own country, it would be supplying about 6.5% of the world’s global crude oil production today, and Texas would be supplying about 6%, according to data compiled by Ingham and the Texas Alliance of Energy Producers.
The U.S. presently supplies 14-15% of global crude oil production, followed closely by Russia (pre-invasion) at about 13% of global production, and Saudi Arabia at 12% of global production. Texas presently produces about 43% of all U.S. crude oil, and the Permian Basin (including New Mexico) supplies about 45% of the nation’s crude oil.
Permian production has fully recovered from the pandemic-related losses of 2020 and is now producing at record levels. Texas is poised to return to record production sometime in the second half of 2022. United States production is not expected to return to pre-pandemic levels until the third quarter 2023 according to estimates from the U.S. Energy Information Administration (EIA). *
“Make no mistake – strong continued supply growth even in Texas and the Permian will be very challenging given supply chain restrictions in terms of both materials and labor,” said Ingham. “However, no other U.S. basin is going to provide meaningful production growth in the near-term. By removing the target on the back of the U.S. domestic oil and gas industry, the federal government and the various producing states can once again create an environment in which the capital necessary to grow domestic production flows to oil and gas companies large and small,” he said.
Between the United States and Canada, its largest and most reliable external supplier of crude oil, the nation can once again quickly move to U.S. and North American energy independence, said Ingham, and production should be returning more rapidly across all U.S. producing states and on federal lands, and waters.
“The oil and natural gas are there in abundance. All the government needs to do is get out of the way and allow companies to respond to the strong market signals to grow production,” said Ingham. “Approve federal permits, re-permit the Keystone XL pipeline, and foster a business environment that gives companies the confidence to go about the business of maximizing U.S. oil and gas production on behalf of its citizens and energy consumers around the world.”
*U.S. Energy Information Administration Short-Term Energy Outlook
Karr Ingham is an Amarillo, Texas-based economist and serves as the Consulting Petroleum Economist for the Texas Alliance of Energy Producers.