President Biden spent much of 2022 exhorting US and foreign energy providers to produce more oil and natural gas. He’s finally getting his wish—though not exactly where he might have expected.
New analysis by consulting firm Wood Mackenzie finds that worldwide fossil-fuel exploration in 2022 hit the highest levels in over a decade. The firm measures new energy finds in terms of “value creation,” which combines the efficiency of new energy discoveries with the amount of energy discovered. Value creation in 2022 totaled $33 billion, assuming oil sells for $60 per barrel. The value would be higher if oil prices rose.
The value of new oil and gas exploration in 2019, the last year before the COVID pandemic, was $22 billion. Exploration rose slightly in 2020 but cratered in 2021, as energy prices collapsed and energy firms faced intense pressure to cut costs. The 2022 discoveries are nearly 6 times as valuable as those from 2021.
More than that, the 2022 discoveries include many “higher-quality hydrocarbons,” according to the WoodMac analysis, which will require less new infrastructure and energy expenditures to extract—and therefore generate fewer carbon emissions overall than has been typical during the last decade.
The most valuable new find is in waters off Namibia, on the southwest tip of Africa. Other important finds are in Algeria, Guyana, and Brazil. TotalEnergies of France netted the most value, followed by state-owned firms in Brazil and Qatar, Petrobras and QatarEnergy. The only American firm in the top 10 was Exxon Mobil (XOM), at No. 9.
“The oil and gas sector has gone through the biggest reset in years, as low oil prices forced them to reduce costs and sharpen portfolios,” says Julie Wilson, director of global exploration research at Wood Mackenzie. “They’re only drilling the best prospects, what they see as the lowest-cost and the lowest-carbon deposits. That means oil and gas found in 2022 has a greater chance of moving forward toward development than lower value creation in the past.”
It could take several years for newly discovered energy deposits to reach global markets, since fields need to be developed, and arrangements finalized between drillers, governments and other parties involved. But a revival in oil and gas exploration represents a kind of return-to-normal for an industry riven in recent years by overproduction that depressed profits, followed by massive losses during the COVID pandemic. At the same time, global warming caused by carbon emissions is driving a shift to green energy and raising pressure on fossil-fuel firms to conserve cash instead of expanding.
Soaring oil and natural gas prices in 2022 revealed an alarming gap between the well-meaning goal of reducing carbon emissions and the need for fossil fuels that still power most of the global economy. U.S. gasoline prices hit $5 per gallon last June, the highest level ever, causing an acute political problem for President Biden and other world leaders. Natural gas levels spiked as well, driving winter heating costs up to levels that are still painful.
Russia’s invasion of Ukraine and subsequent sanctions on Russia, a major energy producer, added to the fossil-fuel supply crunch. But fundamental factors actually laid the groundwork. Oil and gas firms largely overspent and overproduced during the decade prior to the COVID pandemic, which kept prices paid by consumers low, but wrecked returns to energy shareholders. Plunging demand during COVID spread pain throughout the industry. From 2015 through 2021, more than 600 U.S. oil and firms declared bankruptcy.
Biden campaigned for president in 2020 on a vow to "end fossil fuels." But he began to demand oil companies drill more as gasoline prices approached $4 per gallon, then $5, in 2022. US energy firms, however, are private-sector businesses that don’t take orders from the government, as the nationalized oil firms in many Middle Eastern nations do. Most U.S. energy firms are now resisting large expansions in capacity, acutely aware that more energy production usually brings prices down and sometimes turns booms into busts. Biden asked Saudi Arabia and other foreign producers to drill more, with the same unsatisfying result.
Market forces now seem to be persuading energy firms that there’s money to be made through cautious expansion. Despite the shift to green energy, the global demand for oil is still likely to grow, not shrink, until at least 2030, according to research firm Energy Intelligence. Demand for natural gas could peak even later than that, since gas is the cleanest-burning fossil fuel, with a key role as a baseline source of power even with widespread adoption of renewables such as wind and solar.
U.S. energy firms are gradually boosting production, as well. In its latest forecast, the US Energy Information Administration expects U.S. oil production to hit 12.4 million barrels per day in 2023, which would slightly exceed the record high of 12.3 million barrels in 2019. The EIA thinks US production will hit 12.8 million barrels per day in 2024. That’s not the gusher of oil Biden may hope for, but it’s a meaningful increase, given that drillers face headwinds such as labor shortages and material inflation, in addition to activist opposition.
The Intl. Energy Agency expects a very small increase in global oil supplies this year, which could be outstripped by growing demand. Whether the price of retail products such as gasoline or heating fuel goes up depends on two things. The first is Russia. U.S. and European sanctions on Russian energy supplies are due to tighten again in February, which could reduce the global supply of refined products such as diesel fuel. The sanctions are meant to lower Russia’s energy revenue without harming global supplies, but the methods are novel and there’s plenty that could go wrong.
The other factor is the resilience of China’s economy. Strict COVID lockdowns constrained the Chinese economy for much of 2022, and since China is a huge energy consumer, that helped ease worldwide energy demand. That’s one big factor behind falling energy prices in the second half of 2022. But China has ended those lockdowns, and the economy there seems poised to recover. A surge in Chinese energy demand would push energy prices up everywhere.
Overall, oil and natural gas supplies seem likely to be tighter for the next several years than they were prior to COVID. “The market likes to see a supply cushion,” Wilson says. “But we’re going to have to get used to a future where we don’t have that spare capacity. We will probably continue to have volatility in oil prices.” That means every little bit of new production, from anywhere, will be welcome.