Boom or bust? What inflation means for oil and gas.

Some of those issues have started to wane, but U.S. production of oil and gas began to plateau in January and February. Now, there are concerns about weak demand and a potential recession, not production costs.

Inflation and its aftermath have reinforced the unpredictable nature of the oil industry, as operators and consumers seesaw between high and low prices. Shifting conditions also complicate the ongoing move away from fossil fuels because it’s difficult for industry and government officials to plan out energy costs and employment forecasts.

Flatlining production, even in the face of weaker demand and lower production costs, isn’t necessarily a bad thing for the industry, according to David Bat, president of Kimberlite International Oilfield Research. Even though growth is moderating, he said, it’s doing so at a high and healthy level after climbing for two straight years.

“Nothing goes up forever,” Bat said. “Prices have just normalized. Supply chains [are] beginning to stabilize a little, there’s less of a shortage for some electronics and alloys and metals. By and large, we’re reaching a good, normal healthy land.”

Inflation was one of the factors industry executives blamed for stagnating production during the first quarter of this year, according to a Federal Reserve Bank of Dallas survey, along with fears of the global economic outlook after the high-profile failure of Silicon Valley Bank.

Economic worries and recessions often lead to a reduction in demand for oil as consumers cut back on travel, said Kevin Book, a managing director at research firm ClearView Energy Partners.

Data from the Federal Reserve Bank of St. Louis’ Producer Price Indexes showed the rise in costs for extracting oil and gas rose far above the increase in costs for commodities as a whole. At times since Covid-19, the costs of producing oil and gas rose more than 30 percent and, in 2022, as high as 18 percent above normal levels. The cost of producing all commodities rose by less than 4 percent over the same time.

The situation has started to normalize, with the producer price index for oil and gas production dropping every quarter since the final quarter of 2022. In an earnings call in early May, Diamondback Energy Inc. CEO Travis Stice said rig costs were falling and the price of steel was set to decline by $20 to $25 a foot.

But while the price of pulling hydrocarbons out of the ground has decreased, that doesn’t mean companies are rushing now to increase their output. That’s especially true given concerns about the banking sector and fears of a potential recession, according to ClearView’s Book.

“It’s safe to say if we go into a recession, people who sell to oil companies may have to lower prices to entice business like everyone else in a recession,” Book said.

Bat, president of Kimberlite International Oilfield Research, pointed to a couple of main issues for oil and gas operators.

“First of all, you had pricing at historic lows in 2020 from the Covid downturn that created unsustainably low prices,” he said. “Then you had demand for oil field services grow dramatically in 2022 due to elevated oil prices.”

Oil prices briefly dipped into negative territory during 2020 — a point at which producers had to pay folks to take oil off their hands due to limited storage. Operators shut down production across the country as a result. The count of oil rigs onshore dropped from 800 to 200, Bat said, and a workforce of 300 hydraulic fracturing crews dropped to 40.

In all, oil and gas drilling activity dropped by 24 percent that year in the United States.

Some oil field service companies — firms that provide on-the-ground equipment and employees to oil producers — saw 70 percent of their business vanish, Bat said.

That jerk in demand was especially felt at Danos LLC, which primarily provides oil producers with workers to help operate hydraulic fracturing projects or offshore rigs. CEO Paul Danos said the pain was more severe in Midland, Texas, the heart of the Permian Basin.

“We went from being short people to being long on people, back to being short on people in a quick amount of time,” he said.

At the company’s producing height, it had 500 onshore workers assigned to projects, each of whom was assigned a work truck to make sure they could navigate the sandy, pot-hole laden roads to get to their job sites. During the crash, when oil producers turned off the taps, they sold more than half of those trucks in what Danos characterized as a fire sale.

But as the price of oil, and demand, began to rise, it caught Danos flat-footed. The bust suddenly stopped, and companies rushed to get both people and parts on site again. That proved harder than expected, according to Danos.

“Within six months, the prices changed,” he said. “We had no trucks anywhere, especially in the oil field, and we saw the price and even just the ability to get vehicles was very difficult.”

Simply put, it was whiplash.

But the U.S. benchmark price of oil kept climbing, even in the supply crunch. It jumped from a low of $16.55 on average in April 2020 to more than $60 by April 2021.

Then, Russia’s invasion of Ukraine sparked an additional $140 billion in expected investments in fossil fuels, with $50 billion above projections in 2022 and a projected $90 billion in 2023 worldwide, according to a Rystad Energy report. Producers sought to replace Russian natural gas and crude that was targeted by sanctions and embargoes.

Shale production alone was expected to pull in an $80 billion increase in investment worldwide, with oil field services in shale plays jumping nearly 50 percent.

Eventually, the price for a barrel of West Texas Intermediate oil swelled to an average of $114.84 in June 2022. In April 2023, it was down to $79.45. U.S. benchmark oil has traded recently for less than $70 a barrel.

Labor costs

The shift to triple-digit oil prices drove a sea change.

U.S. producers drilled 29 percent more onshore oil and gas wells in 2021 than in 2022, and 36 percent more wells in 2023 than they did in 2022, Bat said. That created a financial need to restart operations across the country.

But the United States could have implemented measures to soften the oil production whiplash, said ClearView’s Book.

“Things could have kept the industry performing,” he said. “The idea of giving oil producers money to create a flowing strategic reserve to help during Covid could have kept a workforce mobilized, and it could have blunted these cost-increase issues.”

Instead, another boom-bust cycle was created in the Permian and in oil fields across the country, leading to thousands of layoffs and a price increase for ramping production back up when needed.

That has made it more difficult to bring people back after the lean times — even with increasing wages, Danos said.

“I think what happens is every cycle with the oil industry is another group of people decide, ‘I just don’t want to live through another oil and gas cycle,’” Danos said. “And there was the broader shutdown of the economy this time, but it was the same, just exaggerated across the whole industry.”

As of early May, Danos’ company had between 150 and 200 positions to fill for oil field workers. The company is working to bridge the gap by recruiting more in high schools and technical colleges, trying to sell the industry as a way to make a good living. And it has invested in virtual reality to show prospective employees what the job looks like.

But elevated wages to entice people to the oil patch have played a role in inflation. Bat of Kimberlite said the cost of labor is among the biggest cost increases that remains.

“We’ve heard a lot about oil companies talking about fiscal discipline in respect to investments; they are working hard to ensure adequate returns,” Danos said. “There’s a constant tension between suppliers and producers on that.”