Alex Mills
By Alex Mills
The member countries of OPEC decided on June 5 to continue their current oil production rate, and see what happens to oil prices. It is a strategy that many analysts believe will put more downward pressure on crude oil prices, which will create more pain for U.S. oil producers, and result in an increase in market share for OPEC.
Already the average price of West Texas crude oil has declined from $97.46 during the month of September 2014 to a low of $45.90 for the month of February 2015 following OPEC’s first announcement in November that it would continue its production target of 30 million barrels per day (b/d).
The price decline sent the oil industry in Texas and throughout the U.S. into a downward spiral. Drilling programs were put on hold, workers were laid off, the Texas Petro Index declined more than 20 points, and the industry went into a recession.
The primary reason for the worldwide price decline was the incredible increase in crude oil production in the U.S. and especially in Texas. The domestic oil industry determined that by drilling horizonatly into shale formations and then conducting multiple hydrofractures, they could increase oil and gas production dramatically. In a matter of just three years, oil production in the U.S. reversed a 40-year decline, and increased from 5 million b/d to 9 million b/d.
OPEC, the major oil exporting organization, viewed the production increase in the U.S. as a threat to their market share.
The amount of crude oil in storage is at least 20 percent higher than a year ago and nearly a record high.
OPEC Secretary General Abdallah Salem el-Badri pointed out following OPEC’s recent meeting all of this happened when oil sold for $100. Now that oil is selling for half that price in a matter of months, the world will find out how resilient the U.S. oil industry can be during this new era.
One example is the federal government’s ban on U.S. companies exporting U.S. crude oil to foreign countries.
How low will prices go, and how long will they stay low?
OPEC has the ability to put pressure on the market place by simply doing nothing.
The ball is now in the hands of America’s oil producers to reduce costs and find more markets for their crude oil.
Already exploration and production companies are working together with service and supply companies to cut costs. Some companies, such as ConocoPhillips, have found ways to reduce expenses up to 30 percent and expect to improve efficiency by up to 20 percent during the next five years.
Countries that make up OPEC have many advantages over U.S. oil companies. They own and run their oil companies, and they own the oil beneath the ground. In the U.S., most of the oil is owned by individuals and oil companies have to negotiate royalty payments, which can amount to 20 to 25 percent of the revenues right off the top. In Texas, there are production taxes of 3.6 percent of value. State, federal, and even cities implement environmental regulations that add to the costs.
In many cases, the U.S. government has had an adversarial relationship with oil companies. Historically, the federal government has implemented price controls, placed “windfall profit tax” on U.S. oil production, and enacted regulations that make it very difficult to compete in the global marketplace.
One example is the federal government’s ban on U.S. companies exporting U.S. crude oil to foreign countries. In the current over supply situation, the ban has added to the differential in price for U.S. crude oil compared to crude oil prices traded on foreign exchanges. Legislation has been introduced in the U.S. House and Senate to remove the ban, but President Obama has said he will veto the bill.
Even though American oil producers have faced many obstacles, there is optimism that the future will be better. As on oil company executive proclaimed recently: “This ain’t our first rodeo.” Many of the companies have been on this roller coaster ride in the 1980s, 1990s, and as recently as 2008. Some of these contractions have lasted years.
Everyone knows, however, that OPEC has many advantages and the financial staying power to increase and prolong our pain.
Alex Mills is President of the Texas Alliance of Energy Producers. The opinions express are solely of the author.
Speak Your Mind