Here's Why Crude Oil Is Over $80 Per Barrel

On Jan. 5, General Motors (GM 1.98%) was showing off its shiny new Chevy Silverado electric vehicle (EV) at CES in Las Vegas. Ironically, the price of crude oil has been hitting multiyear highs in the days that have followed. It's an interesting contrast. Profits for both EV companies and oil companies are surging.

In this video from Motley Fool Backstage Pass, recorded on Jan. 6, Fool contributor Travis Hoium explains to fellow contributor Jon Quast what's driving the high price of oil right now. And the question remains whether oil companies will increase production to increase profits or whether they'll push consumers toward EVs by allowing oil prices to remain elevated. 

Jon Quast: We are talking about oil prices. Travis, I think that you said that they are hitting close to a five-year high, or was it a seven-year high?

Travis Hoium: One of the two. It's been a while since we've been where we are in the oil market today. If you look at the S&P 500 in 2021, it wasn't the stocks that get a lot of headlines that really performed well. It was energy stocks. Devon Energy, I think, was the No. 1 performer in 2021 --

Jon Quast: No. 1!

Travis Hoium: Who would have guessed that? The reason is there was a massive decline in demand and then a huge cutback in supply in 2020 when the pandemic hit. That's understandable. Then 2021, demand recovered, but supply didn't.

There's a couple of charts that I think show this really well. This is just for the U.S. but this is the petroleum products supplier, so this is more than just gasoline oil but a broad indicator. You can see that demand is effectively back to where it was in the late 2010s. What hasn't recovered is the amount of supply hitting the market. This is both global rig count, so that the oil rigs that are drilling for oil, and then the U.S. rig count. And then the blue line is U.S. crude oil production.

All of these things are down. Demand is back to where it was, but not only is supply on a day-to-day basis not back to where it was, but also companies are not investing to replenish that supply. That's why prices continue to go up and up.

One of the things that I've been watching over the last couple of months is what are big oil companies that are putting billions of dollars to work every year going to do with their capital budgets in 2022. You would think in a normal oil market, they're going to expand their drilling because there's money to be made. That's not necessarily the case. ExxonMobil (XOM 0.57%) said that they're going to be spending about $20 billion to $25 billion a year between now and 2025 on capital expenditures. But you can see that their capital spending would still be significantly lower than it was in early 2010 when oil prices were close to where they are right now. We're going to have demand or supply issues for the foreseeable future as these oil companies just cash in on what they can. We'll talk about this in a second, but I think it's because they see EVs coming, and they see the demand is not going to be here forever at the level that it is today.

Jon Quast: Like you point out, and we'll go ahead and just talk about the Consumer Electronics Show [CES]. We're going to talk about it later in the show as well, but another thing that's being showcased at the CES in Vegas is the new Chevy Silverado. Oh, my goodness, I'm drawing a blank here. It's an all-new electric vehicle version of the Chevy Silverado. Really interesting. If you are interested in that thing, I encourage you to watch the video and see what this -- it's pretty sleek. Really interesting how Chevy's thinking through maybe their target customer. There's ways to charge different power tools on a job site. You can even jump-start another electric vehicle from your electric vehicle. They have it all set up for that. And I think some of those things are really practical when you think of maybe who the end-user is going to be for an EV Chevy Silverado.

But to your point, those electric vehicle sales very much on everybody's mind. We see them growing. Ford is doing very well in that regard, as arer other auto manufacturers,. And we're seeing brand new companies come to market such as Nikola (NKLA -2.08%) has finally sold some vehicles. We also see Rivian (RIVN 1.85%) with their contracts. Yeah, the writing is on the wall. If you're an oil company, do you want to keep plowing money into this? It brings up an interesting dilemma. That's what we want to talk about here, is what should investors do with this? On one hand, you see the profits rising for the oil companies, but on the other hand, is it long-term sustainable? Travis, you're up first.

Travis Hoium: I think we'll see a few years here where oil companies will do really well financially, but like you said, the writing is on the wall. One of the things that I'm really interested to watch is how much do they contribute to their own demise? I live in the Midwest. This is not a place where you would see EVs first in the market. We don't have nearly the rate of electric vehicles that a place like California has. But if you see oil go to $100 or $120 a barrel and suddenly gasoline is $5, $6, $7, now suddenly that $50,000 electric vehicle looks a little bit more attractive just from a practical standpoint.

As you said, Jon, as vehicles like trucks and SUVs hit the market, that's going to be really attractive to people. The December numbers are not out, but according to InsideEVs, EV sales were up 70% in 2021 through November and had an 8.8% market share. What's a little bit weird with this dynamic is that's only 10% of vehicles. Even if you could double every year, you're still going to have a lot of conventional gasoline vehicles on the market for the next two decades. It isn't like oil is going away. The problem is, if you're ExxonMobil, or Chevron (CVX 1.20%), or any of these big oil companies, do you just say we're going to cash in as much as we can, let oil go up, and accelerate your own demise by pushing people toward electric vehicles, which would then be more cost-effective? I think that's really what I'm watching. I don't think that buying into companies that we can see their demise. I talked a little bit on the first energy show that we did, that buying coal stocks a decade ago was a terrible idea even though those companies were really profitable because coal's days were numbered. I think that's what we're seeing. It's going to be a much longer time frame, but I think that's what we're seeing in oil right now.