Aalmost a decade A few days ago, a price war broke out between Persian Gulf petrostates and American fracking companies, whose innovative drilling techniques gave birth to the shale revolution. In December 2014 The Economist put an image on its cover of the two antagonists standing back to back, brows furrowed and gas pumps at the ready. He called the new oil economy “Sheikhs versus shale.” Missing from this picture were two companies that were until then the biggest pillars of the American oil industry, ExxonMobil and Chevron. If they had been photographed, the two crusty supermajors would probably be standing awkwardly apart, struggling to make sense of what was happening. They are finally coming back to the forefront.
For much of the interim period, petrostates and shale producers remained critical of the new oil order, even if their struggle played out in strange ways. In 2016, the OPEC the producers' cartel joined forces with Russia to create OPEC+, which its autocratic masterminds hoped would allow them to control oil prices for the benefit of their regimes. Yet instead of reacting by dousing the world with oil, the frackers unexpectedly developed OPEC-like restraint. Under pressure from investors to improve profits, they kept tight control over drilling activities, even when crude rose above $100 a barrel.
This unusual discipline continued until 2023, when American producers awoke from their chaste slumber. Record shale production allowed America to extract more oil than any other country in history, making up for America's desperate efforts. OPEC+ reduce production to support prices. According to S&P. Global, a consultancy, America and Canada together pumped more oil and gas in 2023 than the entire Middle East. The bonanza extended to South America, where producers in Brazil and Guyana also extracted unprecedented quantities of oil. Energy historian Daniel Yergin calls it “the great rebalancing” – a historic shift of oil production from the Gulf to the Western Hemisphere.
It is in this context that two recent megatransactions must be considered: ExxonMobil's $64.5 billion merger with Pioneer Natural Resources, a fracking giant, and Chevron's acquisition of Hess, a producer independent for 60 billion dollars. Both acquisitions are aimed at regaining influence in the oil industry that was once their birthright. On their own, neither company is powerful enough to move oil prices. OPEC+ try. But together they can double production in the Americas, presenting a new challenge for petrostates. Forget disjointed fracturing. It’s the deep-pocketed, tech-savvy supermajors that the sheikhs should be worried about.
The two companies today appear to be the most informed operators on the oil markets. One reason is that they focus on oil that is inexpensive to produce. This will likely put them in a good position when demand for these products eventually declines amid the shift to cleaner energy. Both acquisitions give the duo access to abundant new resources. The Pioneer deal is a significant bet on the future of shale. When completed by mid-2024, the project aims to double ExxonMobil's production capacity in the shale-rich Permian Basin of West Texas to 1.3 million barrels per day. This figure will reach 2 million barrels by 2027. By buying Hess, Chevron also benefits from better access to some shale acreage where, like its larger rival, it hopes to increase production by applying advanced technology and financial power. The company believes that an even greater asset lies in the Hess oil assets developed in partnership with ExxonMobil off the coast of Guyana, the extraction of which is, in the spirit of the times, low in carbon emissions. Taken together, the Western Hemisphere's bets give both companies options regardless of the precise future of oil. Shale is a “short cycle” production that can be quickly adapted according to short-term demand fluctuations. Guyana is a longer-term project.
The second reason the supermajors seem shrewd is that they allow themselves to be guided by oil economics rather than energy geopolitics. Their goal is not to rig prices. It's about making profits no matter what happens in the markets. They can achieve this by integrating exploration and production with downstream operations such as refining and distribution. Compare that with Saudi Aramco, the largest oil company of them all. Like ExxonMobil and Chevron, it is a model of American efficiency. But when it comes to production management, it is also at the mercy of Crown Prince Muhammad bin Salman's desire to walk high on the world stage.
Molecules versus electrons
A third reason for the bright prospects of American companies is linked to their decarbonization strategies. Both have refused to take climate change seriously for too long. But once they did, they chose to support clean energy technologies such as carbon capture and storage and hydrogen production, which fit well with their engineering skills in the field of oil and gas. Interference from their European counterparts, such as Shell and P.A.delivering low-carbon electricity has proven more difficult than expected.
Like everyone else, Americans remain hostages to fortune. Their exposure to shale could run out much sooner than expected; Forecasters are already calling the dwindling number of drilling rigs a worrying sign. In a worst-case scenario (albeit unlikely), Venezuela could attempt to carry out its threat to seize the oil-rich territory of its neighbor Guyana, thereby putting its assets at risk. Worse still, they may have disastrously miscalculated the speed of the energy transition, leaving them with oceans of oil stranded if demand collapses.
But for now, they seem more like old pros in an industry beset by upheaval. They know the importance of focusing on profitable growth, keeping their long-term options open, and sticking to their pro-free market positions. The sheikhs have long insisted that whatever the future of oil, their access to abundant reserves will ensure they are the last oil tankers standing. The American supermajors will not let this happen without a fight. ■
Learn more about Schumpeter, our global trade columnist:
Can anyone except Europe do luxury? (December 20)
Stupid anti-immigration politicians are holding back globalization (December 14)
Elon Musk's messianic complex could bring him down (December 5)
Also: If you would like to write to Schumpeter directly, email him at [email protected]. And here's an explanation of how Schumpeter's Column got its name.