Energy Shambles

Oil and natural-gas prices have dropped dramatically since the end of the Iranian oil crisis. What is not so apparent is the effect that this is having on the U.S. oil industry--particularly the independents that do the lion’s share of field work and drilling. The scope of the problem is starkly evident in a special report in the current issue of Oil & Gas Journal, the respected industry periodical.

The number of active drilling rigs in the United States last week was 1,839, a decline of 27% from September a year ago. The Journal reported that the profits of 209 independent oil and gas companies were down more than 8% during the first half of this year. About a third of the firms lost money, and another third registered lower profits than in 1984.

Average crude-oil prices were off 9%, and natural-gas prices 10%. In sum, the Journal said, “This year’s crop of independents’ earnings reports is shot through with horror stories of sliding oil and gas prices, curtailment of purchases by gas pipelines, losses in contract drilling and writedowns or write-offs of assets.”

That is just part of the story. In a companion article drawn from a Dallas speech, Ray L. Hunt of Hunt Oil Co. outlined the wrenching changes going through the industry in the wake of the exploration and drilling spree that followed the Iranian crisis and that coincided with the removal of federal price controls. Much to its chagrin, the industry discovered that oil and gas demand was not constant, but would decline if the price went high enough. And, Hunt added, the accepted economic models totally failed in forecasting the sudden oil glut and price slump.

One result of the first big price drop, Hunt said, was that “the death knell was rung for the synthetic fuels and alternative energy industries.” The second price break will significantly delay the costly development of fossil fuels in the Arctic, in super-deep offshore areas and of coal reserves.

Meanwhile, the industry is going through a fundamental restructuring and will emerge at some point as a far different creature than it was in 1982. Many independents will not survive. Those that do will be leaner and more efficient.

In the near future the lower oil and gas prices will be a boon to the consumer. But the long-range implications are troubling. Fewer rigs drilling means less new oil and gas being found, particularly in the frontier areas where exploration is very costly. While imported oil is cheaper than it has been in years, particularly in view of the strong American dollar, the Administration has sought to reduce the filling of the Strategic Petroleum Reserve. Pressure will increase to drill in the near-offshore areas, such as along the California coast.

Some Detroit auto makers claim that Americans have a right to buy big gas-guzzling cars if they want them, and the manufacturers are seeking relief from gasoline mileage standards.

The Administration has chosen to leave our energy future to the marketplace. But the market is, to a large extent, a shambles. That does not make for a sound energy policy or a very secure energy future. But the lesson that has meant so much bad news for the independents--that significant conservation is possible--also provides some room for optimism. The more we conserve, the more we insulate ourselves against another possible foreign oil price shock and delay the day that our own reserves become precariously scarce.