Most Recent Dallas Fed Survey Reveals Increased Production Despite Significant Challenges, Uncertainty
Similar to the previous quarter, findings from the latest Federal Reserve Bank of Dallas survey of energy executives indicate companies are experiencing rising input costs, supply chain constraints, and yet, firms are still increasing oil and natural gas production in Texas, southern New Mexico, and northern Louisiana.
However, concerns about the future of oil and natural gas and unpredictable macroeconomic conditions have caused the rate of production growth to decline relative to last quarter. Open-ended survey responses indicate that in large part, the Biden administration’s policies are contributing to pessimism and uncertainty around the oil and natural gas industry. As one executive wrote:
“There is nothing happening in the current administration that would encourage anyone to be in the oil and gas business.”
Following suit with the rest of the economy, input costs increased for the seventh consecutive quarter, with indexes near historical highs. However, the relative increases in costs declined slightly from the second quarter. Costs for exploration and production (E&P) firms, oilfield service firms, and leasing expenses all displayed this trend. This trend is not likely to change in 2022, as the World Steel Association forecast in November connotes continued price hikes:
“Due to the backlogged steel orders, the demand will remain high through the next year. Because of the demand for the limited inventory available, steel prices will continue to go up in 2022.”
On the supply chain side, equipment delivery time has remained a constraint for oil and natural gas firms. While the survey’s index for supply delivery time improved slightly, lead times are still well above the historical average.
Following calls from the Biden administration to increase domestic energy production, oil and natural gas activity expanded this quarter; however, its pace decelerated when compared to prior quarters. This decrease in momentum was reflected in the survey’s business activity indexes. It should also be noted that according to the Energy Information Administration, most new production is occurring in previously drilled but uncompleted wells, indicating developers are more heavily focusing expenditures on existing assets rather than new drilling programs.
In addition to cost and supply-chain barriers, it can be inferred that the decline in the rate of oil and natural gas expansion is due to two primary reasons reflected in the special questions portion of the survey. First, while last quarter’s survey reflected a decrease in uncertainty, this quarter’s results indicate a significant increase. This increase was even more drastic for E&P firms – the companies responsible for discovering and producing new energy supply – as 53 percent reported an increase in uncertainty from last quarter.
Many of the open-ended responses expressed that uncertainty stems from the Biden administration’s policies. According to an executive at one E&P company:
“Specific contradictory statements and positions by the White House, and like-minded politicians following that political agenda, are very harmful for our energy security and are undermining the country’s ability to help with the needs of allies in Europe and around the world.”
Additionally, another statement from a leader in the oil and natural gas industry expressed confusion about the conflicting short and long-term trends in the global energy market:
“It’s tough to tell where these crosscurrents are headed. On one hand… the two-year to ten-year Treasury yield curve is inverted, implying recession, and China is on lockdown basically every other day, so that means lower prices in the near term (probably). But long-term demand is strong, OPEC is underperforming/cutting output, and substitutes like batteries are becoming more expensive daily (e.g., lithium prices).”
Measures of general optimism and confidence in the domestic oil and natural gas sector also slightly decreased in the third quarter. Eighty-five percent of respondents said they expect the oil market to be significantly tightened by 2024. Additionally, when asked if financial investors will return to the oil and natural gas sector, only 11 percent said they believe that many investors will. However, 79 percent of respondents said some investors will return, and only 10 percent said that they expect no investors to return to the sector. This suggests that while there are concerns, energy producers are still exhibiting some level of confidence that conditions will improve.
Bottom Line: As the Dallas Fed’s latest survey shows, the domestic oil and natural gas industry is resilient. Companies continue to expand production even as they face regulatory and supply chain issues, but not at the level that could be possible with sound energy policy.