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In most industries, higher prices provoke a so-called supply response, giving those who can produce more of the desired goods an incentive to get their skates on. Unfortunately, that doesn’t quite hold true in the oil market.
Conventional projects can take decades to build, from discovery to production, which puts them out of the running in terms of responding to the Iran crisis. And while the US’s shale patches have much faster turnaround times — somewhere between weeks and months — higher prices don’t actually give operators as much of an incentive to let rip as US President Donald Trump may have hoped.
On the face of it, that may look counterintuitive. After all, in the favoured Permian Basin, the break-even price of new wells averages $67 per barrel, up from $65 last year, according to the Dallas Fed Energy Survey. With US crude oil currently trading above $100 per barrel and forward curve remaining well above $70 for the next 12 months, the prospect of higher margins should be enticing operators to increase production as much as they can. But not all of them are. While Diamondback Energy announced an increase in its rig count, Chevron and Exxon are sticking to their original plans.
So what explains this apparent reluctance to pile in? It may simply be that the war hasn’t yet given operators the time to react and amend their plans and schedules, or that the majors have other, juicier uses for their cash. Another potential issue is that oil and gas companies may not believe they will be the ones to capture the incremental margin.
The problem, here, is that US shale fracking is a complex logistical effort, with a supply chain involving trucks, rigs, pipes, water and sand, among the various elements. There is some slack in the system, but not a huge amount. There are between 10 and 15 per cent fewer rigs in use now than there were in 2024, so some extras may be lying about. But for some of the most sought-after components, utilisation is above 90 per cent, according to WoodMackenzie.
That suggests that, should everyone do a Diamondback, they would quickly bump up against logistical constraints. And that, inevitably, means that the price of the supply chain components that run short would rise too.
To put this into perspective, capex costs for shale wells rose by about a third between 2021 and 2022, thinks Wood Mackenzie, when operators rushed to restart production after the pandemic. A similar jam today would lift break-even costs to $90 per barrel, leaving US shale operators with wafer-thin margins and lower overall profit than they have now.
What’s more, it seems reasonable to suppose that the Iran crisis will, at some point, be resolved. And when that happens, the price of oil will fall faster than operators might ever hope to wring out inflation from their cost base. A quick boost to domestic production would be useful for America’s politicians and consumers. But for the companies themselves, discipline trumps it by a country mile.
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