What is the answer to the disagreement between Big Oil and Biden on oil prices? Check the S&P 500's top stock.

• Due to Russia's invasion of Ukraine, President Biden prohibited Russian oil imports and Secretary of Energy Granholm urged for increased domestic crude oil production on Wednesday, stating that the country is now in a "war footing."
• During 2020, U.S. oil production decreased by 3 million barrels per day due to the influence of Wall Street and investor pressure on drillers to exercise caution.
• In seven out of the past ten years, the energy sector has been the poorest performer and has incurred significant financial losses, amounting to billions of dollars, during the fracking boom.
• The oil industry has been performing exceptionally well, and both investors and companies are reluctant to abandon it.

The world seemed to be in a comfortable, fiscally conservative state when the fourth-quarter earnings were announced on Feb. 15.

Despite losing nearly 90% of its value from 2014 through October 2020, the Oklahoma City-based oil and gas producer was the top-performing 2021 stock in the , thanks to a strategic approach of reducing exploration, cutting costs, and taking less risk. The company turned a 2020 loss of $2.5 billion into a $2.8 billion profit for 2021, raising its dividend 45% and investing nearly $600 million in stock buybacks after spending just $38 million the year before. The company also promised to continue showering cash on its once-beleaguered shareholders.

"Our CEO, Rick Muncrief, boasted on a conference call that Devon generated the highest level of cash flow in our 50-year history," said the CEO. "We achieved our goal of being a shareholder-friendly business by leading the industry in cash returns."

Nine days later, Russia invaded Ukraine.

Devon and other oil producers are facing demands to cut Russia off from global energy markets, but this is challenging since Russia is the world's third-largest oil producer and supplies much of Western Europe's heat and electricity through its natural gas. Although a new Quinnipiac poll shows that 71% of Americans support expanding sanctions on Russia's oil and gas industry, U.S. oil producers, including Devon, are not eager to take on the additional burden.

The oil industry's negative free cash flow of nearly $20 billion in 2015 and the $78 billion loss between 2005 and 2017 due to hydraulic fracking, lower crude prices, oversupplied markets, and overextended drillers explain why oil is reluctant to assist Ukraine. Free cash flow is a measure of the money oil companies invest in new wells, which is subtracted from accounting profits over the expected life of the wells.

Big Oil's rebound and reluctance to drill

Devon's turnaround was one of the more dramatic. In 2021, it reinvested only 32% of its operating cash flow in new wells, retired $1.2 billion in debt, raised its dividend, and bought back nearly $600 million of its stock just in the fourth quarter. This year, it planned for more of the same: Another $1 billion in debt reduction and $1.6 billion in stock buybacks,  a company worth $32 billion before war broke out, with only a third of cash flow being reinvested in more drilling.

On the following day, Goldman Sachs analyst Neil Mehta's report on Devon did not address Ukraine, as no one had inquired about it during Devon's conference call regarding quarterly results.

As The Godfather stated, when Big Oil thought it was finished, people wanted to bring it back. Similarly, Devon CEO Rick Muncrief is not in a hurry to produce more, unless he receives clear instructions from the White House.

"When considering investment decisions, increasing capital budgets, and growing more, it is crucial to consider inflationary pressures and anticipate that it will take approximately a year before seeing the full impact of production. As a result, publicly traded companies, including ourselves, will be cautious and thoughtful in their approach. We are aware of the challenges surrounding commodity prices, but we must remain patient, disciplined, and focused."

Prior to that, he had informed Bloomberg that he was "perplexed" by President Biden's failure to engage in discussions about increasing oil production, which could have facilitated energy companies' ability to present a stronger case to their shareholders.

At CERAWeek by S&P Global, Secretary of Energy Jennifer Granholm urged oil and gas executives to increase production on Wednesday.

Granholm stated that the country is on a war footing due to the emergency situation. She emphasized the need to increase short-term supply to stabilize the market and prevent harm to American families. However, she also mentioned that further releases from the Strategic Petroleum Reserve are not entirely ruled out.

"Granholm emphasized the need for increased oil and gas production to meet current demand, stating, 'I hope your investors are saying these words to you as well: In this moment of crisis, we need more supply,'" the official said.

A spokeswoman for Devon stated that their position has not changed since Muncrief's comments to Cramer, but emphasized that the situation is constantly evolving.

Replacing Russia's 10 million barrels

The IEA reports that Russia produces 10 million barrels of crude oil daily. President Biden's announcement to ban Russian imports was straightforward as the US imported only 90,000-100,000 barrels a day from Russia, a small fraction of the 18 million barrels consumed daily in the US. However, replacing the four million Russian barrels that go to Europe daily, along with Europe-bound natural gas, is a challenging task.

The oil industry hopes to remain uninvolved in the political fray, as Senator Elizabeth Warren continues to criticize it, and even as crude oil prices reach $125 a barrel on global markets, analysts predict. Meanwhile, investors plan to hold their ground, according to Rob Thummel, portfolio manager at Tortoise Capital, a major investor in energy stocks. The new financial arrangements in the oil industry are seen as a win for Wall Street, which has been losing money on energy investments for years, with the S&P 500 oil and gas index dropping 75% from 2014 to early 2020, Thummel said.

"Thummel stated that the sector experienced rapid growth in production over the past decade, but energy stocks were the poorest performers in the S&P 500. As a result, people questioned the business model. This led to a shift towards a "prove-it" model, where investors prioritize cash flow, debt repayment, dividends, and stock buybacks."

What would be the source of oil to fill the 95 million barrel per day world oil market gap resulting from lost Russian production or sanctions if U.S. oil is financially constrained?

Goldman Sachs analysts contend that the US will not be the largest contributor to new barrels if Russia is cut off.

OPEC, the Organization of Petroleum Exporting Countries, which collaborates with Russia but has not officially recognized it as a member, is the first place where replacement barrels would come from. Goldman predicts that the core OPEC nations, including Saudi Arabia, the United Arab Emirates, and Kuwait, could increase their daily production by 2.1 million barrels within a few months.

While reports suggest that leaders of Saudi Arabia and the UAE have recently declined to accept phone calls from President Biden, they have been talking to Putin, which may hinder prospects for the region.

As Russia's exclusion from the global economy increases, analysts predict that core-OPEC, Iran, and the West will become closer, leading to an increase in supply. However, it may take weeks for this outcome to occur, and a month for supply to start increasing.

On Wednesday, crude oil dropped 12% due to indications of greater supply willingness from OPEC countries, including the UAE.

Goldman Sachs analysts wrote on March 7 that Iran and Venezuela, considered pariah nations, are being overlooked for their past transgressions against the U.S. and the West because their oil is needed now.

The US has been attempting to persuade Iran to adhere to the 2015 nuclear disarmament agreement since Biden took office, in order to lift the sanctions imposed by the Trump administration in 2019. Venezuela was sanctioned by both former presidents Donald Trump and Barack Obama due to various reasons, including suppression of protests, cooperation with terror groups fighting to overthrow the Colombian government, alleged drug smuggling, and other transgressions.

Goldman is cautious about the potential for increased production from Venezuela and Iran. It predicts that Venezuela could only add approximately 500,000 barrels per day if sanctions were lifted, and Iran's production would not rebound until at least summer, with output reaching 1 million barrels per day in the fall.

Inflation is an issue for oil companies, too

In the U.S., oil production decreased by more than 3 million barrels per day between 2019 and early 2021, according to government data. This decline was caused by a significant reduction in drilling activity, as evidenced by the drop in the number of oil rigs working from 1,077 in late 2018 to 250 in mid-2020, according to industry data compiled by.

The challenges to increasing production rapidly are significant, according to Matt Portillo, research director at Tudor, Pickering and Holt. These obstacles include labor shortages that are difficult to resolve, as workers who were laid off during production cuts have found other employment. Additionally, supply chain issues impact various aspects of production, from steel tubing to specialized sand used in hydraulic fracking. ConocoPhillips CEO Ryan Lance stated in a CNBC interview that the oil production supply chain is experiencing double-digit inflation for essential inputs like sand.

Vicki Hollub, CEO of , stated on Tuesday at CERAWeek by S&P Global that the current situation is extremely dire. The pandemic has caused supply chain disruptions not only in the oil and gas industry but globally. As a result, any attempt to grow production at a rapid pace is extremely challenging due to the supply chain difficulties.

Capital discipline is viewed as "essentially no growth" by investors, according to Hollub.

Portillo predicts that U.S. shale production will increase by approximately 650,000 barrels per day this year, with most of the growth coming from smaller, privately held producers who are not subject to investor pressure. While integrated oil companies like Exxon have announced modest production increases, mid-sized exploration companies, which are responsible for the majority of drilling, are working diligently to resist pressure.

"Portillo stated that in 2022, there is little chance of seeing a difference in capital commitments, and there are physical constraints that limit expansion in the short term."

According to Peter McNally, vice president and global energy sector lead at Third Bridge, the Biden administration has limited options to speed up new oil production. Expanding drilling leases on federal lands, as some politicians have suggested, would not deliver new barrels quickly enough due to the time required to construct wells and prepare to drill. This view was also expressed by CEO Scott Sheffield, who stated on CNBC that the majority of U.S. oil production comes from privately owned land.

"That won't be useful in the next 12 months," McNally stated. "That's closer to three years."

The average price of regular fuel at U.S. gas pumps has increased by 50 cents to $4.10 per gallon in the last week, according to the U.S. Department of Energy.

The industry and investor base are not convinced that the current prices will sustain long enough to provide a stable, enduring return on investment.

"To obtain shareholder support, we must fulfill our contractual obligation to return 80% of our free cash flow to our investors, as stated by Sheffield."