How Do Current Events Affect Oil and Gas?

Kevin Thibeau and J.P. Bolton, Principals, Wheeler Resource Recovery

Political decisions, extreme weather events, and shifts in the economy impact all industries, and the oil and gas industry is no exception. This past year, economies worldwide experienced drastic changes due to the conflict in Ukraine, reinforcing the reality that there are no certainties regarding the economic climate of our nation and the world in the future.

While it remains uncertain what challenges our country might face ahead, the only certainty is that change will occur. With that in mind, our team of experts at Wheeler Resource Recovery, will walk you through how current events like summer travel season, natural disasters, and periods of economic uncertainty could affect the oil and gas industry.

What does it mean when gasoline prices fluctuate from day to day?

Gas prices constantly fluctuate as a response to economic, political and climate-related shifts in the world. 2022 brought the highest gas prices that the U.S. has seen yet, capping out at over $7.00 in parts of California. The United States is not the only country that experienced the financial burden of high gas prices as the war in Ukraine impacted economies all over the world. Russia is responsible for supplying 10% of the world’s oil and gas reserves, and with financial sanctions in place for Russia following the war – there is a gap in the global supply. Also, homes in Europe require natural gas as their main form of energy, which means that Europe’s high demand for gas is driving up the bidding price for all nations. Another contributing factor to gas prices is oil refineries having to close for maintenance or shutting down as a result of an accident, making the industry unpredictable because they can close at any given time. 

Ultimately, when oil and gas prices rise or fall it is due to the ebb and flow of supply and demand. If refineries and entire nations are unable to contribute to the usual supply of oil, the cost will inevitably rise just as the cost would fall if there is a surplus of oil. 

How will summer travel impact oil and gas prices?

One such example that causes demand to spike is peak summer travel months. The Transportation Security Administration (TSA), airline companies and rental car companies are heeding warnings that summer 2023 is expected to break record travel highs. Over Memorial Day Weekend alone air travel is expected to increase by 11% since last year, and AAA is expecting 42.3 million Americans to travel 50 miles or more. 

With a growing demand for oil and gas in the coming months, we can expect to see higher gas prices.

How do natural disasters affect the oil and gas industry?

Catastrophic weather events like hurricanes, tornadoes, and blizzards can quickly impact the oil and gas industry as oil refineries and rigs often lose power and are forced to pause their operations. Oil and gas pipelines can also be erupted, causing workers to scramble to assess and repair any damage done to pipelines’ infrastructure. Hurricanes are arguably the most threatening weather event to the oil and gas industry in the United States. With a six-month long hurricane season, it is common for gas prices to soar following large storms as half the nation’s petroleum and natural gas capacity is located near the Gulf Coast, which puts gas and oil in a constant state of vulnerability as the location of the reserves is likely to be damaged by harsh weather. These potential issues do not diminish the need for energy.  They only create a favorable climate for energy asset holdings.

What would recession mean for oil and gas?

Oil and gas tend to be “recession proof” as there is always a demand to heat homes, power factories, and fuel vehicles. During a recession, people are limited to how much money they can spend and allocate to necessities versus non-essential items.  People spend less on non-essential products and allocate a greater percentage of disposable income to energy, food, medicine and shelter. However, the oil and gas industry’s current state is unlike what it was during past recessions, which begs the question of how a recession would impact the industry today. Normally, there is a substantial amount of spare oil and gas in reserves, but the current capacity is only 1.5% of global production, meaning that there is a very small amount of oil and gas to spare. This also means that oil and gas inventories and capacities will not increase unless demand ceases, which is why a recession would actually be beneficial for the industry. A recession would give oil rigs and refineries the opportunity to replenish their stock and return to normal capacity levels.

Oil and gas investments have favorable tax deductions. Will that continue to be the case?

There is a possibility that the current administration will reduce the highly desirable tax deductions for capital invested in drilling projects.

If the current administration were to change the tax deduction policy for drilling project investments, it would likely take months to years before the new legislation would be implemented. Any investments made prior to the reduction would still have the same benefits of the current tax code. If someone is interested in investing in the oil and gas industry, it would be advantageous to make the decision sooner rather than later to take advantage of the current policy, which declares all oil and gas costs as 100% deductible. This will eliminate the risk on their investment since the tax changes would only apply to future oil drilling projects.

How can investors take advantage of high oil and gas prices?

Under the current combination of market factors – growing demand, constrained supply, and favorable tax environment – oil and gas investments offer an unmatched opportunity for individual investors. In particular, secondary oil recovery provides a low-risk high-reward investment. To explore which oil and gas investments are right for you, contact Wheeler Resource Recovery.