Energy‘War on Fossil Fuels’ Drives Uncertainty Among Texas Oil and Gas Producers

A renaissance that began with the fracking revolution and took off with 2015’s lifting of the crude oil export ban created an abundant supply of cheap, plentiful energy, due primarily to Texas’ prolific oil and gas production. 

But that unstoppable force met the immovable object of the global pandemic and its resulting government shutdowns — a wrench thrown into the global engine, seriously affecting the fuel that powers it.

Oil prices sit consistently above $110 per barrel. Average gasoline prices in Texas have eclipsed $4.50. And natural gas prices in May were three times higher than in 2019.

Fossil fuel producers do not see a break in these high costs any time soon, according to a survey done by the Federal Reserve Bank of Dallas.

Uncertainty about their industry is as prolific as was their fossil fuel production before the pandemic.

Nearly half of respondents blamed labor shortages, inflation, and supply chain bottlenecks as the primary causes for oil and gas production concerns — each of which is an indirect consequence of government policy.

Responding to the coronavirus pandemic — a factor outside of their control — federal, state, and local governments shut down business operations across the nation: grounding air travel, closing everyday businesses, or putting strict constraints on ingress and egress of persons.

This sent a ripple effect throughout the global supply chain, creating a self-fulfilling disruption for both demand and supply. Fewer people traveling meant less demand for fuel. Less demand for fuel at first drove down the cost of oil to historic lows, but then led to less fuel production when the market adjusted. As travel demand recovered, the production side struggled, and continues to struggle, to catch up — playing into the high prices currently seen.

Another consequence of the shutdowns, unemployment skyrocketed both as a result of the closures themselves and the loss of business profits the lockdowns exacerbated. The oil and gas industry is still struggling to return to pre-pandemic levels of employment — employing 30,000 fewer workers than at the end of 2019.

To cushion that financial blow felt by the millions of newly unemployed — the business left with no choice but to shed payroll — Congress opted to print trillions of dollars, hoping to stabilize the economy.

While it momentarily put some money into pockets, the country now faces 40-year high inflation, currently sitting at 8.6 percent. Inflation means higher costs, whether it’s labor, materials, or the end product — affecting every point along the energy supply chain from the wellhead to the gas pump.

Most respondents said they don’t see the supply chain problems being resolved in the next year.

But the second-highest primary contributor to industry uncertainty is regulation from the federal government. The Biden administration — which tried to toe the line between the environmental faction of his party and the oil and gas-reliant faction during his campaign — has sent mixed signals to the oil and gas industry.

On the one hand, Biden has called on the fossil fuel industry to ramp up production to put downward pressure on fuel prices. He’s also put in motion a release of 130 million barrels of oil from the nation’s Strategic Oil Reserve — a total that accounts for about a week of the nation’s oil consumption.

But his administration has also placed fossil fuel producers under increased regulatory scrutiny.

The nation’s largest oil and gas-producing region, the Permian Basin, is staring down the barrel of a new Environmental Protection Agency (EPA) regulation. The new rule would redesignate certain counties in the Permian Basin under the Clean Air Act — a broad-sweeping law that grants the EPA significant authority to regulate operations.

The Clean Air Act, and the authority it grants the EPA, is the subject of a legal challenge currently in front of the U.S. Supreme Court; the ruling is likely to come out this week.

EPA regulations have shifted substantially from presidential administration to administration. Five years ago, the Trump administration EPA announced the rollback of the Obama administration’s heightened regulations on the Permian’s energy producers. But this redesignation would either reinstate or build upon those Obama-era restrictions.

In a letter to the White House, Gov. Greg Abbott warned the rule proposal “could result in draconian regulations imposed by the EPA that would directly attack America’s most prolific oil field.”

The Permian Basin accounts for 40 percent of the nation’s oil production.

“If you do not [rescind the proposal], this action alone might serve as a catalyst for economic harm leading to an even deeper reliance on imported foreign energy and a faster economic decline into the pending recession by forcing even more pain for American consumers to pay at the pump,” Abbott said.

Similar to its campaign rhetoric, the Biden administration has pushed the envelope on renewable energy development. Included among its set of strategies, the administration has said it will employ the Defense Production Act to expedite construction of large capacity batteries needed to store renewable generation.

While he’s called for larger short-term production, the long-term policy path from the White House has focused on renewable development — a position of which the fossil fuel industry has taken notice.

One executive told the Dallas Federal Reserve, “The current administration [in Washington] declared war on fossil fuels before going into office, and they have continued that war to this day.”

Another comment in the survey states, “Government animosity toward our industry makes us reluctant to pursue new projects.”

One executive stated, “Mixed messages from politicians remain unhelpful to longer-term projects and commitments.”

“Politicians need the reminder that a barrel of oil does not go directly into the gas tank of a car. Broadly speaking, permitting of all kinds remains difficult, if not impossible, and the lead times are forever.”

Over 80 percent of the respondents said that it’d take them anywhere between four months and a year to drill a new oil well — a lengthy timeline made more difficult due to regulatory hoops.

There is no easy or immediate solution to runaway inflation and rising energy costs. But Texas fossil fuel producers, who drive much of the economic activity within the state, point to a clear obstacle standing in the way of a return to $2.00 gas: the current inhabitant of 1600 Pennsylvania Avenue.