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Higher Gasoline Prices = Increased Production, Right?


Higher gasoline prices means higher production, right? Well... don’t buy the boat….yet.

Higher prices at the pump is not necessarily a sign to celebrate in the patch, just yet anyway.


When you’re in oil & gas, you typically don’t complain much about high gasoline prices. Yes, you pay a little more to fill up that big F350 4x4, but that big price per gallon, usually means we’re all busy at work.


Today’s dynamics are different. The pandemic is a variable we have never seen before, which means our historical data is not accurate. Basically, all bets are off!


John Hofmeister, former head of Shell, was recently on The Michael Berry Show, with an interesting perspective on the current energy climate. Hofmeister said, that the CEO’s of major energy companies are risk averse on spending, needing to prove to shareholders that they will be financially responsible, post-pandemic. The necessity of this stance is heightened by the fact that the majority of these same majors suspended dividends in 2020. This was due to the extremely low demand, caused by the lock down.


Do they have cash? YES! With an increase in demand, that cash pile is growing. This cycle usually means capital investment, and a lot of it. Higher gasoline prices have historically been accompanied with an increase in demand, which then created an increase in production, and here we go round the O&G mulberry bush, the mulberry bush, the mulberry bush….


So the price at the pump is going up. Today’s national average is around $2.80. The big boys are piling up cash. So where are the new permits, rigs, jobs, new infrastructure, and purchase orders for new services and equipment? What’s wrong with this picture? It’s the ying and the yang. The peanut butter and jelly. The sweet and spicy. The bee and the honey.


Gasoline prices go up, oil & gas business is strong! Right?


Travel back with me, three paragraphs up….. remember those dividends that were suspended in 2020? Yes, shareholders actually want a return on their investments, which they are owed, and deserve. We’re pulling out of the pandemic, the country is turning off the “fasten your life” sign, and most states have made the announcement that “you are now free to move about the country”. This means that the shareholders want their investments to begin working again. Translation….. reinstate the dividends.


The growing pile of cash, or most of it, is going to pay dividends to shareholders. The CEO’s must demonstrate that they can navigate through these uncharted waters, take care of the increased demand, get the investors back on track, THEN invest in growth and make them even more money. Rinse, dry, repeat.


We have the supply, so there’s no issue there. Midstream is completing large legs that will help with transmission and the DUC well count is at an all-time high. All this, coupled with a steady climb in oil and natural gas prices, means we are on the comeback. It’s not a super “V” recovery, but that’s ok with most of us in O&G. Those super spikes are difficult for the majority to handle anyway. Folks I visit with would much rather see a nice steady growth. It’s about the journey, eh? That’s debatable, but a consistent steady growth is easier for most companies to handle. And since O&G operates on the backs of the small to midsized companies, a good balance is healthy.


Everything is lining up for a GREAT RECOVERY for our industry. We may not be able to understand the route by traditional mile markers, but we’re headed there. Just keep moving.


Think of it like this….. During the pandemic, mom and dad (the majors) got a little tight on cash. Now that mom and dad are both back at work, we can turn the cable TV back on, and run the A/C, but we need to catch up on some bills (pay the shareholders) before we buy the new boat. But we’ve been looking at new boats, and this weekend we’re going to pick one out! Just need a few more checks firsts. (Cheeky analogy, but you get the idea)


GOOD NEWS O&G FRIENDS! The recovery is happening! Depending on your sector, you may not “feel” it yet, but it’s on the way.


Stay in the fight!


There’s POWER in the patch!

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