KORNER REPORT / Natural Gas & Crude Oil
Cheap Oil's Price Worldwide Glut To Continue
Tulsa World
It is difficult to understand, much less explain, how cheap gasoline is not really good for American motorists. And although he was explaining the surplus of crude oil in the world, Oil and Gas Journal Editor Bob Tippee indirectly helped Tulsans to see the effects of the glut on gasoline prices and the world economy.
Tippee, a former Tulsa World reporter, forecast a continued surplus of oil for 1999 in a talk before the International Society of Energy Advocates here Tuesday. The surplus will continue because the factors that have contributed to the glut -- and the plunge in prices -- have not changed.
Think the events of Asia are far away and have no bearing on the United States? Then listen to editor Tippee, whose magazine, is the bible of the oil and gas industry. The Journal had forecast the Asian demand for oil at 9.6 million barrels per day. At the end of the year, a slumping Asian economy demanded only 6.8 million barrels a day.
At the same time, Iraq turned its production up because U.S. sanctions allowing sale of oil for humanitarian purposes was set in dollars, not barrels. When the price of oil fell, the Iraqis simply increased production. Ditto for most of the members of OPEC.
Since Oklahoma oil producers compete with the foreign crude, prices for domestic crude oil plunged. That is the reason Gov. Frank Keating has called a special session of the Legislature for this month to try to give the state oilmen some temporary tax relief.
Meanwhile, the price of gasoline also has plunged, because the glut of crude oil means that refiners are paying less for the raw material to make fuel. It is of course one of the benefits of the worldwide glut, but cheap gasoline is a high price to pay for the loss of the payrolls and taxes that the oil industry ordinarily would be contributing to the economy.
When is cheap gasoline too costly? When the nation's domestic oil industry is devastated; when Oklahoma's already dwindling oil fields -- which will certainly be needed some day -- are abandoned because no one can afford to keep them in operation in the face of a flood of foreign oil.
IPE Board To Consider Merger With Nymex
International Petroleum Exchange directors next week will discuss a proposal to merge with the New York Mercantile Exchange, a combination that would create a near-monopoly in energy futures trading.
The proposal, made by the Nymex last November, is "on the agenda" of the IPE board's regular, bimonthly meeting, to be held Jan. 26, said Seana Lanigan, an IPE spokeswoman.
A merger could bring Nymex's electricity and natural gas futures trading experience to the IPE as Europe's power markets start to deregulate. The Nymex in turn would receive greater access to the European market.
"We'd like this (merger) to go ahead sooner rather than later," Lanigan said. "However we can't tell how the Nymex will react to our counter proposals or what shape any merger could come in."
The Nymex isn't expected to discuss the merger for a week or two because its board next meets in the first week of February, said Nachamah Jacobovits, a Nymex spokeswoman.
Yesterday the IPE invited more than 100 of its members for an informal session to discuss topics they wanted addressed at the board meeting.
Little Concern
Traders said the dominance of a combined IPE-Nymex was unlikely to harm global energy markets or trading firms.
"We don't expect any merger to be detrimental to those companies participating in the exchanges," said Chris Allan, who runs BP Amoco Plc's futures trading in London. The company has seats on both exchanges.
Last year the IPE and Nymex each formed committees to evaluate the advantages of a merger. Each group included exchange members and the respective chief executives.
An earlier round of merger talks between the two exchanges was called off by the IPE a year ago, when the London exchange's board said it didn't see an economic advantage from merging with any exchange. Nymex again pitched a proposal to the IPE late last year.
The two exchanges control virtually all of the world's futures trading in crude oil, heating oil — called gasoil on the IPE — gasoline and natural gas. The Nymex also has four electricity futures contracts that have yet to face any real competition in the U.S.
The U.K. Financial Services Authority would have to approve a merger, as would the U.S. Commodity Futures Trading Commission.
Iraq To Ask OPEC To Reduce Saudi Oil Quota
Oil Minister Lt-Gen Amir Muhammad Rashid {al-Ubaydi} has announced that Iraq will ask OPEC to reduce Saudi Arabia's oil production quota by one-third, and said Saudi Arabia is responsible for the drop in oil prices.
The oil minister said his ministry had taken several measures in the light of the thorough analysis by His Excellency President Saddam Husayn exposing the Saudi oil policy and the harm that has befallen the oil-producing countries from the drop in prices.
Decline In Crude Prices Hits Hard In Tiny Oil Town
At Howard Supply Co., dog food is selling better than the gaskets, couplers and well fittings that for decades helped keep crude flowing from the giant Midway-Sunset oil field nearby.
Since the store opened in 1944, Howard Supply has survived in this tiny central California town by selling heavy-duty hardware unique to the oil patch.
But after a historic slide in crude prices, oil producers large and small are shutting down wells and laying off employees. At Howard Supply, sales are down 80 percent, forcing store manager Hope Binkley to move the oil gear to a back room and experiment with new products, like pet food and veterinary supplies that might appeal to farmers.
"You have to find something," said Binkley, who has worked for oil-dependent businesses since 1976. "I've seen a lot of ups and downs, and this is by far the worst."
The price sag that has helped fuel the nation's long economic boom has turned into a big bust in Taft and other towns across America that depend on oil.
In recent weeks, large companies including [ Atlantic Richfield Co. ] , [ Occidental Petroleum ] , [ Texaco Inc. ] and [ Conoco Inc. ] have announced plans to lay off thousands of employees and curtail drilling and exploration worldwide. Smaller drilling, marketing and service companies are doing likewise.
Last week [ Baker Hughes Inc. ] said the number of oil and gas rigs operating in the United States has fallen to its lowest level since it began tracking rig counts in 1944.
The downturn also has prompted mergers of big players. [ Exxon Corp. ] plans to acquire [ Mobil Corp. ] while [ Amoco Corp. ] has teamed up with British Petroleum Co. PLC. There have been rumors of a union between [ Chevron Corp. ] and Royal Dutch-Shell.
In Kern County, California's biggest oil producing region, about 1,000 of an estimated 12,000 oil workers have been laid off or will be in coming months, said Hal Bopp, deputy director in the Bakersfield office of the state Division of Oil and Gas.
Crude prices are at their lowest levels since the Depression. Light sweet crude traded at $12.28 per barrel on the New York Mercantile Exchange on Friday, but the price for the heavy crude pumped from most wells in Kern County is even lower, around $7 a barrel, $1 or more per barrel less than it costs to get it out of the ground.
"We're going broke," said James Hall, president of Drilling & Production Co., a small company that operates about 30 wells.
In March, Hall imposed a 20 percent pay cut on himself and his 10 employees to avoid layoffs. Even with the cuts, he's not sure he can survive another year at current price levels. Most of his employees are looking for new jobs outside the oil industry.
Foreman Darin Holden, 33, advised Hall this week that he would be gone by summer, when his wife is due to deliver the couple's third child. After the pay cut, Mrs. Holden went back to work, but even with the added income, they've exhausted their savings to pay their bills.
Other employees tell similar stories.
"Just to make everyday expenses you raid your retirement account, you raid the college funds you set up for your kids," said Mike Pilatti, 42, a father of three.
Conditions are especially tough for small, independent producers such as Drilling & Production that operate "stripper" wells, those that produce less than 10 barrels a day. Independents depend exclusively on crude prices for their profit margins. Big oil producers such as Chevron or Texaco can build profit into the retail sale of gasoline and other petroleum products.
Of Drilling & Production's 30 wells, about half are in operation, each yielding one to five barrels a day. On a recent afternoon, Holden was trying to figure out whether it was worth the cost of repairs needed to bring six more into production. With the producing wells already in the red at $7 a barrel, there seemed to be little point in spending thousands of dollars to bring more money losers on line.
Nationwide, such stripper wells yield about 1.2 million barrels a day, about 20 percent of U.S. production and roughly the equal to the amount imported from Saudi Arabia. Should stripper operators go out of business, the nation's dependence on foreign oil will rise and a skilled work force will be lost, independent operators say.
"Once you lose workers, they're not coming back," said Les Clark, vice president of the Independent Oil Producers' Agency, a marketer that represents about 40 California independents. "They'll get solid jobs and stay away."
Holden counts himself among those not likely to return. When recession hit the industry in 1986, he was the first let go from Drilling & Production's payroll. He stayed in the industry that time, working another job at nearly half his previous pay until being rehired in 1992. The personal price of that downturn included the breakup of his marriage.
"I was bankrupt and divorced all in the same week. I'm not going to relive that," said Holden, who later remarried. "It'll be hard to leave here. I like the industry, but you have to look to the future, and right now I don't see any future."
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