u/bbb23sucks

The response to an oil crisis would instinctively be to increase oil production. However, I have been thinking about, and I'm curious if, due to perverse incentives, the exact opposite would actually occur.

High oil prices create an incentive to cut oil usage. Oil companies presumably know this. If they expanded production, there would be a large overproduction in the future because of the lower demand. From what I understand, oil production, particularly the modern shale extraction and off-shore extraction, requires a high initial capital investment. So expansion of oil production would therefore be a waste of capital.

As this article mentions, there are ways of increasing the output of existing oil rigs, which does not require capital expenditure. But this comes at the cost of significantly reducing the total yield of the field. So this might not make financial sense either.

Besides, lower oil supply might actually benefit oil companies to a degree. If the increase in oil price outweighs decrease in production, they profit. Indeed, I believe many oil companies are actually making more profit now than before.

I've explained why they might not expand oil production, but I was thinking that they may even want to start cutting oil production. Why? Because the current size of oil production was based on forecasts of much higher future oil usage than will likely happen, now that high oil prices have disincentivized oil usage. So it may actually make sense for them to begin shuttering oil rigs now in anticipation of lower than expected future usage.

This would then result in even less oil production, and then therefore even higher prices, further exacerbating the whole cycle.