The obvious solution to the global oil shock finally makes sense

The answer for the past couple months has been consistent: Oil producers are operating at maximum output, there’s nowhere to put the crude they’re extracting, refineries are at or near max capacity, and it just doesn’t pay to explore and drill new wells.

The underlying challenge is that oil drilling is a complex and expensive process that takes years to come to fruition. Wells drilled in 2026 may not start to produce until 2036. That kind of long-term investment makes financial sense only if oil prices sustain above $90 a barrel.

Well. Oil is back above $110 after negotiations between the United States and Iran broke down. The Strait of Hormuz shows no signs of reopening anytime soon. Goldman Sachs last month said it expects oil prices to remain above $90 a barrel through at least the end of the year.

Time to drill, baby, drill?

Perhaps. But it’s complicated.

Big Oil companies are eager to diversify their operations. The war with Iran proved that oil companies with production facilities all around the world have a strategic advantage over businesses that were locked into one region.

“The war on Iran is likely to prompt a rethink of the geopolitical value of production outside the Middle East,” said Luisa Palacios, former Citgo chairwoman and current managing director of Columbia University’s Center on Global Energy Policy. “However, it is not as straightforward as this high level of prices suggests.”

Diversification takes time, money and planning. The historic logjam and maxed-out storage capacity may solve the long-term money issue by keeping prices high. But oil companies looking to expand production will want to ensure that customers are going to demand their crude by the time their new wells and drills come online.

Refining capacity in the United States has been a problem for years. Four refineries have closed in California so far this decade because of environmental regulations and high costs. The last new refinery with significant capacity in the United States was Marathon’s facility in Garyville, Louisiana, which was built in 1977.

Some US oil companies may look beyond the current market volatility and refining shortage because many of America’s shale wells are starting to run out of “tier 1” oil – the easiest and most lucrative oil to drill.

KPMG estimates that in 2027, America could hit “peak shale” oil production from the fracking boom over the past couple decades.

“We’re running out of top-tier inventory,” said Angie Gildea, KPMG’s global head of oil and gas. “Barring new technology, you need to be able to find new crude somewhere else.”

The United States isn’t alone: The world’s 30 largest oil exploration and production companies face production declines averaging nearly 40% between 2025 and 2040, creating a 300-billion-barrel shortfall of the 1 trillion barrels the world is expected to need between now and 2050, data and analytics firm Wood Mackenzie said.

All this presents a big opportunity – particularly for Latin America. The region already accounts for 10% of the world’s oil production, and it faces none of the chokepoint risks of the Middle East.

In addition to Latin America’s huge liquefied natural gas export potential, particularly in Mexico and Venezuela, about 750,000 barrels of new crude production is expected each day this year from Brazil, Guyana and Argentina, according to Ehsan ul-Haq, energy analyst at Petroleum Economist. It’s an easy and ready place to invest.

Latin America could double its liquefied natural gas exports by the end of the decade, the Center on Global Energy Policy’s Palacios said. And Brazil could increase its oil production by 30% at the end of the decade, according to Palacios.

Regime change in Venezuela has added that nation, with its vast oil reserves – and all its problems – to the mix. It’s a fixer-upper, for sure, but it’s an investment that could make sense and may pay off down the road. Chevron is all-systems-go there.

No one expects Venezuela to return to an output of 3.5 million barrels per day from before the Chavez and Maduro regimes. But increasing its output from below 1 million barrels per day last year to 1.5 million barrels per day over the course of the next year or two is within the realm of possibility, Palacios said.

Searching for new oil is a risky gamble. Sometimes companies drill and strike out.

“The first four big wells we tracked in 2026 came in dry – that’s the game, and players know the risks,” said Andrew Latham, senior vice president of energy research at Wood Mackenzie.

Meanwhile, particularly in the United States, significant skepticism remains about the sustainability of higher prices. (and fresh memories of the oil price crash last decade that bankrupted hundreds of fracking companies). Since the oil price crash, many of the country’s drillers have been taken over by larger, much more conservative oil companies like ExxonMobil and Chevron.

Oil exploration fell off a bit last year, sinking to $16 billion worth, down from an average of $19 billion a year between 2021 and 2024, according to Wood Mackenzie.

Demand destruction could also keep prices in check. That’s when prices are so high that people and companies stop purchasing oil. For example, high prices of oil and gas have begun accelerating the switch to renewables – demand for China’s solar panels have surged in the past month.

So, US companies looking for new oil may seek short-term gains by drawing from already drilled wells that aren’t currently producing – not necessarily from new exploration, according to Dan Pickering, founder and chief investment officer at Pickering Energy Partners. – CNN