Price Plunge Chills Nation’s Oil Industry
This week’s nose-dive in oil prices has sent a chill through the U.S. oil and gas industry, triggering a reassessment of its cautiously optimistic plans to produce and look for more oil in 1988.
While good news for consumers, the sudden drop in prices puts the industry in a squeeze just as it was showing signs of recovery, and that could bring more hard times to the nation’s already reeling Oil Patch states.
The price decline continued Thursday as crude oil plunged below $15 a barrel on world markets, then recovered somewhat to close in the mid-$15 range. Prices have now fallen 14%, or nearly $3 a barrel, in the last week after remaining relatively stable all year.
Oil economists are divided about what will come next, but there is general pessimism.
Even without further price drops, “it will be a significant setback for the producing industry,” said John Lichtblau, president of the Petroleum Industry Research Foundation, an industry-funded think tank. “At the moment, nobody sees any bottom.”
Thomas Burns, manager of the economic staff at Chevron, said $15 a barrel is probably a “temporary plateau” before prices head down further. He said the only thing that prevents a replay of 1986’s price collapse is winter demand for heating oil, soon to ease, and anxiety over the Persian Gulf.
On the New York Mercantile Exchange, the price for January delivery of a 42-gallon barrel of West Texas Intermediate crude, which stood at $18.44 a barrel one week ago, has fallen for five straight days and dropped to $14.90 early Thursday. But during the day, the price of the benchmark variety of U.S.-produced crude recovered to close at $15.84. Traders said the recovery was mainly for technical reasons, and the market is still unsettled.
The newly bleak outlook for the Oil Patch--and its promise of cheaper gasoline and other petroleum products--stems from the seeming paralysis of the Organization of Petroleum Exporting Countries at its year-end meeting in Vienna, which concluded Monday.
The 13-member cartel, which earlier this year appeared to have brought oil markets under control, proved unable in analysts’ eyes to take the steps needed to bring production back in line with demand after several months of excess oil output by some members.
On top of a massive worldwide inventory buildup resulting from oil companies buying discounted oil as a hedge against Persian Gulf interruptions last summer, OPEC members are now estimated to be pumping 1.5 million barrels per day more than the world requires--an overhang that is expected to worsen early next year as winter demand subsides.
Burns called it “a prescription for disaster that (OPEC) did nothing about.”
Although consumers can expect to see a difference at the pump eventually, this week’s sharp price drop is not likely to mean significantly lower gasoline prices. By the time the cheaper crude oil is refined and distributed, the recent decline of almost $3 a barrel might translate into no more than a nickel-a-gallon drop in retail gasoline prices, experts say.
Official Price Holding
OPEC had succeeded in returning world prices to the $18 range after they bottomed out at $10 per barrel in the summer of 1986. The cartel’s official $18 price for a 42-gallon barrel had held through most of this year, and most forecasts had called for slowly rising prices in 1988 to the $19 to $20 range.
“A lot of decisions were made on the assumption that prices would be higher in ’88 than they were in ‘87,” said Lichtblau. “The industry made assumptions it is beginning to revise. There are wells that are (abandoned) at $16 a barrel. U.S. production is already declining, but it will decline faster. We might lose a couple of hundred thousand more barrels per day.”
Said Burns: “Fifteen-dollar oil will intensify the process of deciding just how much exploration is worthwhile.”
The first public disclosure of retrenchment came Wednesday when Phillips Petroleum announced plans to eliminate up to 10% of its work force because the outlook for oil prices had deteriorated in recent weeks as heavy discounting by OPEC members spread in the industry.
“We had expected prices to recover somewhat, but they have been lower than expected,” a Phillips spokesman said Thursday. “We came to the conclusion that because of this, our projected revenues will be lower than expected. These decisions were in the works before OPEC met, but what OPEC did bears out our lower-price forecast.”
Industry Cautious
Massive cutbacks, however, seem unlikely because virtually every oil company underwent a severe retrenchment when prices collapsed by two-thirds in 1986. Since then, despite a recovery from the $10-per-barrel trough, the industry remained cautious in boosting spending for exploration and production.
“Generally, having gone through 1986, the industry will be better able to face what happens in 1988,” said Burns.
The OPEC agreement essentially freezes price and production for the first half of 1988 at the same level that has officially prevailed since June. Most economists believe that if OPEC adhered to its price and production system, today’s huge inventory buildup would not have occurred. Likewise, they see no reason to think OPEC’s members will obey their own guidelines now.
Indeed, as prices weaken further, the incentive grows to offset the lower price by producing more oil. And Chevron’s Burns said the cartel would have to cut production more sharply than otherwise to recover the psychological ground it has lost in the past week.
“They’ve kind of let the horse out of the barn,” Burns said. “They might have to drop (production) by 3 million barrels a day to get people’s attention.”
OPEC May Reconvene
In announcing their agreement late Monday, OPEC leaders said they will reconvene quickly for an emergency meeting if prices fall by a “significant” amount. They refused to define that, but Lichtblau said: “You can’t argue it isn’t already significant. Some people joked that they should turn in their plane tickets and stay in Vienna; the emergency’s already here.”
Pressure was brought to bear Thursday from Norway, where unnamed government officials were quoted as warning that they will withdraw their support of OPEC’s policies unless the cartel gets its own production under control. One of the biggest non-OPEC oil producers, Norway has restricted its own output of North Sea crude oil over the past year to bolster the cartel’s price and production-fixing system.
“We cannot afford to stay with OPEC if it cannot put its own house in order,” said a government source quoted by the Reuters news agency.
But the political divisions faced by the cartel were underscored by reports this week that even as OPEC finalized its modest agreement Monday, Iran had stepped up its price discounting and dispatched several more tankers of so-called “homeless crude.”
