(Bloomberg) – The Texas bigwigs who ushered in America’s shale revolution are resisting the temptation to pump more oil as the market rallies, signaling higher gas prices for consumers already hit by the worst inflation for a generation.

Bloomberg’s Most Read

Crude prices rushing toward $100 a barrel would typically trigger a frenzy of new drilling by independent explorers in shale fields from the desert southwest to the high Great Plains — but not this year. Influential players like Pioneer Natural Resources Co., Devon Energy Corp. and Harold Hamm’s Continental Resources Inc. just pledged to limit production increases in 2022 to no more than 5%, a fraction of annual growth rates of 20% or more predicted in the pre-pandemic era.

The timing couldn’t be worse for consumers. Outside of OPEC, which has rejected calls from U.S. President Joe Biden to accelerate production increases, domestic shale fields are the only other source of crude capable of responding quickly to supply shortages. Combined with rapidly growing global consumption, the conservatism of US drillers is expected to keep oil prices high for some time to come.

“Whether it’s $150, $200 or $100 oil, we’re not going to change our growth plans,” Pioneer CEO Scott Sheffield said in an interview with Bloomberg. Television. “If the president wants us to grow, I just don’t think the industry can grow anyway.”

To be sure, U.S. oil production will increase significantly this year and is expected to return to pre-pandemic levels by 2023. But that likely won’t be enough to knock oil prices off their upward trajectory anytime soon.

According to IHS Markit Ltd, publicly traded independent explorers like Pioneer and Devon account for more than half of the roughly 10.5 million barrels America produces daily from fields in the contiguous 48 states. The rest comes from family businesses. and the international supermajors, all of which are aggressively increasing their production.

The story continues

Exxon Mobil Corp. and Chevron Corp., for example, are targeting 25% and 10% shale growth, respectively, this year. At the same time, private entities funded by private equity firms and family funds now control the majority of the country’s active drilling rigs. At the start of this week’s quarterly earnings season, investors worried that independents were showing signs of weakening discipline. After all, the benchmark price for North American oil has jumped 22% this year, approaching $96 a barrel at one point. That’s more than double the price needed to make a healthy profit in places like the Permian Basin of West Texas and New Mexico. Retail gasoline at U.S. gas stations, meanwhile, is already higher than it has been since 2014, an ominous sign in a market that closely tracks swings in crude markets.

“Whether it’s $150 oil, $200 oil or $100 oil, we’re not going to change our growth plans.” — Scott Sheffield, Pioneer CEO

But the message from shale country is loud and clear: Independents will not repeat past mistakes by flooding the world with cheap oil. Record cash flow will flow directly to investors in the form of dividends and buybacks, CEOs say. That means American drillers are leaving a lot of crude oil in the ground. If they chose the other route — pouring windfall profits into new drilling — they could easily inflate national production by 2 million barrels a day, according to IHS Markit. According to current forecasts, the United States will add less than half of the world’s supply this year.

“We’ve had enough head simulations that we’re being very thoughtful about ramping up activity,” Devon Energy Corp. CEO Rick Muncrief said in a phone interview. “Let’s face it: we’re all recovering in one way or another from this pandemic. We’re slowly getting healthier over time, but you don’t get there overnight.

Such comments are a far cry from the golden age of coasting “drill, baby, drill” at the turn of the century, when shale rocked global oil markets with year after year of record production. Seasoned CEOs like Muncrief, Sheffield and Hamm have seen too many crisis cycles to get carried away again.

The unprecedented oil price crash of 2020 exposed an industry that burned more than $200 billion in the previous decade to make America the world’s largest crude producer, leaving little for shareholders . Even after the rally in oil stocks over the past year, US energy companies make up just 3.6% of the S&P 500 index, down from more than 12% a decade ago.

“The growth experiment has failed,” said Jeff Wyll, principal analyst at fund manager Neuberger Berman Group LLC, which manages about $400 billion in assets. “We are in a new paradigm.” The United States will add between 750,000 and 1 million barrels of daily production this year, according to recent estimates from the Energy Information Administration, Rystad Energy AS, ESAI Energy LLC and Lium LLC. But that’s less than a third of the International Energy Agency’s global demand growth forecast, meaning it won’t be enough to subdue the oil rally.

“Whether it’s $150 oil, $200 oil or $100 oil, we’re not going to change our growth plans.” — Scott Sheffield, Pioneer CEO

According to Pioneer’s Sheffield, it is up to Saudi Arabia and the United Arab Emirates, the only two OPEC countries with significant spare capacity, to make up any supply shortfalls. Above all, independent US drillers are still extremely cautious about grabbing too much of the market share controlled by OPEC and its allies, which have fought two price wars with shale in less than 10 years. .

“US shale has already lost twice in a head-to-head battle with OPEC,” said Morgan Stanley analyst Devin McDermott. Independent producers “focus on cleaning up balance sheets, lowering equilibrium prices and returning money to investors – not growth.”

Bloomberg Businessweek’s Most Read

©2022 Bloomberg LP