Soaring oil prices put US shale in a bind

This is an audio transcript of the FT News Briefing podcast episode: Soaring oil prices put US shale in a bind

Marc Filippino
Good morning from the Financial Times. Today is Wednesday, February 16th, and this is your FT News Briefing.

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Stocks ended higher yesterday as tensions over Ukraine eased a bit, and a big name in artificial intelligence is funding research into the hard problems of AI, plus the saying in the oil patch used to be, “Drill, baby, drill!”

Derek Brower
Ultimately, the reason that people start out in oil is to drill more holes in the ground, and that’s what they like to do.

Marc Filippino
But pressure from Wall Street is making some shale energy producers hold back. We’ll talk to our US energy editor, Derek Brower, about this drillers’ dilemma. I’m Marc Filippino, and here’s the news you need to start your day.

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Markets enjoyed some relief yesterday as the prospect of Russia attacking Ukraine eased bit. US and European shares rallied after Russia said it had begun pulling back troops along the Ukrainian border to their bases. The S&P 500 index rose about one and a half per cent. Oil prices also fell back from their steady march upward. Brent crude fell three and a half per cent, but our US capital markets correspondent Kate Duguid reminds us that this is already a time for extreme jitteriness in the markets.

Kate Duguid
At this moment we are reacting to the littlest bit of news from the Fed. Last week, when it seemed like an invasion was imminent, investors sold riskier assets like US and UK stocks and then bought up safe haven assets like government debt. But on Tuesday, when that invasion did not seem so likely, those moves began to unwind. What’s really interesting here, I think, is that in the US is that the Ukraine-Russian news has been tempering some of the market’s reaction to last week’s super hot inflation print. But then demand for those safe haven assets on the Russian news has reversed some of that move. So we’ve got these kind of competing forces at play, especially in the US Treasury market at the moment.

Marc Filippino
Kate Duguif is the FT’s US capital markets correspondent.

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Now yesterday, as stocks rose, oil prices dropped but Brent crude and West Texas Intermediate have been steadily increasing towards 100 bucks a barrel. If they hit 100 bucks a barrel, it would be the first time since 2014, and that’s got shale oil companies in the US itching to fire up their drilling rigs. But many are holding back. That’s largely because of past lessons learned and the fear of Wall Street’s wrath. Here’s our US energy editor, Derek Brower.

Derek Brower
The industry that has re-emerged post-pandemic is trying to tell Wall Street, tell investors, that it can actually make money in the future, but it’s doing that at the expense of not producing as much oil any more.

Marc Filippino
So what do investors think about scaling back, Derek?

Derek Brower
Well, the funny thing is, before the pandemic, US oil producers, shale producers, were producing more and more oil, but they weren’t making very much money. Now they’re producing less oil, but they’re making money hand over fist. Some of these companies, companies like Pioneer Natural Resources, Devon Energy, who I spoke to down in Oklahoma City last week, you know they are making more money than they have ever in their history because they’re not spending as much money on drilling. And that is actually starting to win back some investors from a low base. But some of these investors say, well look, I mean, the dividends of these companies are paying out for the first time in their history to really, really, really big dividends. So there is this kind of battle being waged almost in the minds of the shale executive class. You know, these are men that often grew up thinking they needed to drill more and more wells, and you know, to the glory of America, they need to produce more and more oil. And now they’ve had to adjust their mindset to produce profits instead of more and more oil. And they’re starting to like this because many of them are paying themselves some of these dividends.

Marc Filippino
Sure. Makes sense. So what does this mean for the shale industry long-term? And can shale energy producers maintain this kind of restraint on drilling?

Derek Brower
The American shale industry thinks it has finally arrived at a place where it can grow production modestly and not overwhelm the oil market with too much supply. That was one of its problems in the past, at the same time, as it actually starts to generate profits. The big problem is that as oil prices rise, some of what they are referring to as capital discipline, this new model, a lot of people fear that the companies will just get back to doing what they used to do with just producing more oil and forgetting about this notion of capital discipline, of returning money to shareholders. Because ultimately, the reason that people start out in oil, generally speaking, is to drill more holes in the ground, and that’s what they like to do. So it’s hard to believe that an industry can change its spots so quickly. The shale industry is swearing blind. These public executives are saying, I promise you, we are not going to waste all your capital on drilling too many, too many wells again. But Wall Street’s still pretty sceptical.

Marc Filippino
Derek Brower is the FT’s US energy editor.

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So as you probably know, artificial intelligence is a huge part of our lives. But there’s also growing awareness of the problems it’s creating. Its algorithms have biases and they fan political divisions. Now a tech titan behind AI says he wants to fund research to help solve these problems. The FT’s Madhumita Murgia spoke to former Google chief executive Eric Schmidt about his new $125mn fund called, AI 2050.

Madhumita Murgia
It seems that they’re also interested more in the future of what AI is going to look like in 2050. And for that, you know, the other questions they’re concerned about and that sort of comes back to Schmidt’s experience, you know, in the National Security Commission, you know, they’re interested in also geopolitical questions around, you know, how do we, how, when different countries are competing over AI, how will that work?

Marc Filippino
But as Madhu points out, this non-profit, which is supposed to fund non-commercial research, is very much overseen by company executives.

Madhumita Murgia
So this is actually something that Schmidt himself acknowledged. You know, he said the money comes from Google Wealth, and so he thinks that this is kind of a recycling, you know, wealth that’s created by Google that’s then recycled. I mean, I think we should also note that the co-chair of this foundation, oh, this grant, rather, is James Manyika. He’s the new head of technology and society of Google. He says that, you know, he’s playing this advisory role in a personal capacity. But I think it just goes to show that, you know, so much of the talent and the money and the ideas in AI is so sort of concentrated in the hands of corporates like Google, like Facebook. Even large universities are struggling for funding and for talent when they’ve got to compete with these companies.

Marc Filippino
Madhumita Murgia is the FT’s European technology correspondent.

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Before we go, about 3,000 Airbus workers in the UK voted overwhelmingly to go on strike, possibly as early as next month. The key issue here is pay. Their union describes the salary offer by the aerospace company as unacceptably low. Workers want the company to put up an offer that reflects rising living costs. Airbus says its company in the UK has made the offer based on the context of the pandemic’s impact on business. The threat of a strike comes as Airbus is trying to increase production to meet rising customer demand. [music playing] You can read more on all of these stories at FT.com. This has been your daily FT News Briefing. Make sure you check back tomorrow for the latest business news.

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