2023 PVF economic outlook Volatility will be present this year as it has been for the last few years.

By Dr. Chris Kuehl, ASA Chief Economist

There are few sectors of the economy where forecasters look more foolish than in oil and gas.

Nearly every prediction ends up being revised over and over again. The reality is that oil is a classic “inelastic good” and that means that consumption reacts very little to price — at least in the short run.

People need what they need and don’t necessarily reduce their commute because the price goes up —just as they don’t lengthen it when prices drop. The U.S. is slated to consume some 20 million barrels a day in 2023. As recently as five years ago it was 24 million bpd. This reduction has been attributed to the expansion of remote work and the subsequent reduction in the daily commute.

The U.S. will be producing a record level of oil in 2023 — between 13 and 14 million bpd. There will likely be some slowdown in rig count early in the year, but with any economic rebound that count will go up. The EEA is predicting per-barrel oil prices at around $90, gas at the pump at around $3.60 and diesel at around $4.10. Gains in revenue will likely flow through to the bottom line as companies focus on containing costs and using technology to improve exploration and production efficiencies.

Given the geopolitical climate and the uncertainty around the depth of the recession there will still be big spikes in the per-barrel price and corresponding drops — volatility will be present in 2023 as it has been for the last few years.

Saudi Arabia aims to build 54gw of renewable capacity by 2032, the UAE is eyeing 100gw of renewable-energy capacity by 2030, at home and abroad, up from a cumulative investment in 15gw-worth in 2021. That would make Masdar, a state-controlled clean-energy outfit, the world’s second-biggest developer of clean energy. It recently bought a British firm developing energy storage technology.

The Gulf’s biggest green bets concern hydrogen. If it is made using renewables as opposed to natural gas, hydrogen is a clean fuel. There is a sense that renewables and fossil fuels will be sharing the energy stage for quite some time. The EIA asserts the world will still be 70% dependent on fossil fuel by the year 2050. The sanctions on Russia have had a minimal impact on oil production and they still have the sixthlargest reserves in the world. The EU is trying to cap prices for Russian oil but this has been met with resistance within Europe as many nations are still highly dependent on Russian output (especially diesel and gas). The tug-of-war between fossil fuel and alternative fuels will dominate energy sector thinking for the foreseeable future. There are opportunities for ASA members in either field — it is basically a matter of tracking the investment flows.

Count the rigs

Rig count is one of several measures used to predict future oil and gas output. It tends to be a lagging indicator in that demand stimulates interest in investing in new rigs. Right now, the pace of rig development has been stalled by the reminder that rig count is a lagging indicator and therefore says more about last year than about the coming year.

There is a possibility that crude oil prices decrease over the next four years. This is based on an assumption that higher interest rates will trigger a recession and reduced consumption. In the past, this drop in consumption has been matched with reduced output by the major producers and that would affect the offshore oil rig and platform construction industry.

The importance of energy security

At the same time, there is more interest in developing energy security and that encourages more domestic expansion as a means to be less vulnerable to situations like those that affected this past year. These trends tend to counter each other but for the purposes of planning, the drive to develop energy security has more staying power than concern regarding recession. Thus far, there has not been a noticeable drop in demand and many analysts are now suggesting that a downturn in 2023 would likely be mild and not deep enough to impact fuel consumption.

Regulations, environmental events and various exogenous factors can drastically alter the industry’s performance. Over the next five years it is estimated that industry revenue will decrease at an annualized rate of 2.1% to $2.4 billion. This is not a consensus view by any stretch as some analysts are saying an increase of 50 in 2023 and some say a decrease of 50.

The reality is that oil and gas producers are energy companies and as such they wish to make money from all varieties of power production. The west has been trying to cut Russia’s oil-export revenues without causing global prices to spike since February. Russia exports as much oil as before its invasion of Ukraine but is being discounted. Financial investors seem to have had a greater hand than usual in depressing recent prices, which could portend a sudden upwards correction when the fundamentals of supply and demand kick back in.

Events that might have pushed prices in the past (partial shutdown of the Keystone pipeline on Dec. 9) seem to have barely registered. Right now, the energy companies and countries dependent on energy are attempting to diversify as they see opportunity in developing renewables.

Crystal ball

As mentioned above, fuel is an inelastic good and that essentially means that consumption doesn’t react to price very quickly. Fuel is a necessary purchase if one wants transportation and therefore reacts slowly to changes.

In the long run, people may decide to buy a more fuel-efficient vehicle or move closer to work but this will not be a quick adjustment. Prices react primarily to production decisions and these are made based on future expectations. If there is a sense that recession is coming, the assumption is that less oil and gas will be consumed. If there is an assumption that growth will accelerate, there will be more demand.

U.S. shale production is expected to peak in 2024 and that is a similar position to that facing OPEC+. The nations with the largest reserves are Venezuela, Saudi Arabia, Iran, Canada and Iraq. The U.S. is not even in the top 10 at this point, but has the largest strategic petroleum reserve (378 million barrels). The reserves in Venezuela are at 145 billion. The U.S. is in a position to develop more of a reserve with the expansion of fracking and offshore expansion if it chooses to.

Given that new supply takes between 12 and 24 months to come to market, the oil producers will try to determine consumption trends at least that far out. The per-barrel price for oil determines about half the cost of a gallon of fuel and there are very often wide variances between the pricing for oil and the pricing for fuel.

ASA Chief Economist Dr. Chris Kuehl hosts a live economic update webinar each month and also produces three economic update podcasts per month exclusively for ASA members.

ASA to debut new website

The American Supply Association continues to offer its members programs and initiatives that will best help it compete in an ever-changing business climate.

And now all ASA has to offer will be accessible on the association’s brand-new website at www.asa.net. The new site, slated to debut early in Q1 2023, will provide an overall better user experience with greater ease of navigation.

Visitors to www.asa.net will be able to access valuable information directly on the homepage, such as upcoming events, industry news and career recruitment tools. Visitors will experience an overall better registration/checkout experience for all ASA products, services and events.

The new, updated look provides the best reflection of ASA as the industry’s only national trade association, helping membership grow and members to feel even prouder to be a part of ASA.

Mark your calendars for 4 great ASA events

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