Recent Dallas Fed Energy Survey Shows Increase In Business Activity, Optimism Despite Cost Headwinds

The most recent Federal Reserve Bank of Dallas survey of energy executives operating in Texas, northern Louisiana, and southern New Mexico found that overall activity in the oil and natural gas sector trended up in the third quarter of the year, but cost increases remain a worry.

This increase in business activity, seen in the third quarter of 2023, is credited to exploration and production (E&P) firms operating in the bank’s district. E&P firms also drove the broader increase in business outlook, which saw a forty-plus point jump quarter-over-quarter from negative sentiment to positive territory.

Executives surveyed reported increases in both oil and natural gas production, and faster production growth for both products than the preceding quarter. The uptick in domestic production is a promising sign in light of recent OPEC+ production cuts and the cartel’s forecast that demand for oil and gas will continue to grow for the next several decades. Rystad Energy explains that despite recent “peak oil” and “peak gas” projections, demand forecasts still require the buildout of new natural gas fields:

“[T]he current set of existing gas fields will not meet global demand, requiring rapid growth in unconventional gas supply.”

For the eleventh consecutive quarter, energy firms also reported a rise in costs as inflation persists throughout the economy. Specifically, the survey found that among E&Ps, finding and development costs – the costs incurred when a company researches, purchases, permits, and develops a site – made up the bulk of companies’ cost increases, and rose quarter-over-quarter.

But hostile policies from the Biden administration towards oil and natural gas exploration have industry executives expecting site development costs will continue to rise. One executive at an E&P firm explained:

“As the White House administration continues its policies to slow down exploration and hence production, it should have the effect of increasing commodity prices.”

President Biden’s antagonistic posture towards the domestic oil and natural gas industry is one of several factors contributing to high energy costs. Volatility in global oil and natural gas markets continues to escalate in response to war in Ukraine and in the Middle East, OPEC+ production cuts, the threat of strengthened sanctions on Iranian oil exports, and a renewed push to cap the price of Russian oil.

Oil and natural gas executives surveyed shared concerns that domestic policies intended to hasten the energy transition will drive costs up further. Nearly 66 percent of all executives surveyed said they expect the energy transition to significantly (32.6 percent) or slightly (33.3 percent) increase the price of oil over the next five years.

Overall, executives representing various E&P firms are wary of policies that unequally push renewable development. One executive surveyed emphasized the need for realistic policies that recognize – and support – the continued use of oil and natural gas in the global energy mix:

“While the development of alternative energy sources moves forward, I still believe the need for hydrocarbons in its various forms will increase over time.”

While the International Energy Agency puts forward tenuous claims that global oil and natural gas demand will peak in the coming decade, the survey’s respondents disagree – the majority of executives surveyed expect global oil consumption to be higher in 2050 than lower compared to current levels, with 25 percent anticipating significantly higher consumption and 28 percent anticipating a slight increase.

Bottom Line: While oil and natural gas firms have been able to steadily increase production levels to meet global demand, aggressive anti-fossil fuel policies, an unstable global energy landscape, and a push for renewable energy development are contributing to high costs and elevated uncertainty.

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