The price of oil topped $130 per barrel late on Sunday, and despite falling back to around $120 per barrel on Monday, there doesn't seem to be any stopping high prices in general. Russian oil is the news of the day, with countries in Europe trying to find ways around buying Russian oil.
In the long term, the disruption in the Russian oil supply to the global market has put a magnifying glass on the lack of oil exploration over the last decade. High oil prices aren't a short-term phenomenon, they're the product of nearly a decade of underinvestment by the oil industry, and there's no flood of money coming anytime soon.
Image source: Getty Images.
Russia the catalyst
According to the Energy Information Administration, Russia is the third-largest oil producer in the world, supplying 10.5 million barrels per day, or 11% of the world's supply, in 2020.
Russian oil hasn't been banned by western buyers yet, but Russian banks have been cut off from the rest of the world, and it's not clear how oil will make its way from Russia to Europe. Even if Russia isn't completely cut off, even a minor disruption of 11% of the world's oil supply is a very big deal and is a gap that can't be filled quickly.
Oil drilling in the U.S. has been falling for years
As it turns out, the biggest oil producer in the world -- the United States of America -- has been reducing its oil production, in large part, because lower oil prices have made the oil business uneconomical for drillers. You can see below that drilling peaked in 2014 when oil peaked at over $100 per barrel but has been falling ever since.
WTI Crude Oil Spot Price data by YCharts
There's a long lag between the time when a well is drilled and when it starts producing oil, though, so there's also a lag between the peak in drilling and the peak in production.
U.S. Crude Oil Production data by YCharts
It's certainly possible that U.S. oil producers will increase drilling in coming months now that oil is over $130 per barrel, but even if they do, it'll be months -- if not years -- before production rises in a significant way. By then, we could see oil prices plummet, resulting in a wave of bankruptcies from oil drillers, as we saw over the last few years.
The reality is that there aren't many oil companies eager to go out and start drilling today. And financiers like banks and institutional investors aren't handing out money to drillers either, whether it's because they don't want to take the risk or because they have other environmental priorities.
Rinse and repeat around the world
This dynamic isn't unique to the U.S. Brazil, Mexico, and countries on the western coast of Africa also had big oil drilling plans through 2014, only to have those investments prove fruitless when oil prices dropped.
$130 per barrel oil changes the equation if we know Russian oil will be off the world market for years, but that's not a guarantee at the moment. Investors who were burned during the shale boom or the early days of the pandemic when oil traded for negative prices for a moment may be hesitant to invest billions to get the drilling business back up and running again.
And let's not forget that labor is also hard to come by right now, even for more glamorous jobs than oil drilling.
High oil prices will be here for a while
The supply challenge we're seeing today may have been caused by Russia's invasion of Ukraine in the short term, but it's been nearly a decade in the making. Investment in oil drilling hasn't matched the growth in demand in the developed world, and that's not something anyone can fix overnight. I'm afraid high oil prices will be here for a while.
