Slowing Demand Driving Decline in Oil and Natural Gas Prices

Opinions by Alex Mills at FWBusinessPress.com.

The decline in U.S. demand for crude oil, estimated to be as much as 2 million barrels of oil per day or about 10 percent of consumption, has resulted in a dramatic decline in crude oil and natural gas prices.

The decline in price has resulted in a contraction in exploration activity.

The Baker Hughes drilling rig count, one of the leading petroleum economic indicators, has declined 21 (2 percent) in Texas to 925 rigs working.

However, other economic indicators continue to outpace last year.

Drilling permits issued by the Railroad Commission of Texas (RRC) increased 55 percent in October over October 2007 (2,693 to 1,737) and for the year drilling permits are up 27 percent (21,330 to 16,835).

Oil completions jumped 160 percent in October compared to the same period last year (988 to 379) and gas completions are up 25 percent (1,277 to 1,020).

Even oil production, which has been on a steady decline since the 1970s, rose 1 percent in October to 29 million barrels of production in October. Natural gas production is up 4 percent.

Employment in the oil and gas industry continued to rise with 226,600 Texans employed in October compared to 210,100 in October 2007.

Most of the pullback in the drilling sector has come from high-cost activities, such as in the Barnett Shale in and around Fort Worth. As the competition for leases, drilling rigs and services rose in recent years, so did the cost of drilling and completion.  Just five years ago, only 50 drilling rigs had capabilities of drilling the complicated horizontal well. Today, an estimated 600 rigs have the capability to drill horizontal wells.

The industry has witnessed a reduction in these costs recently as some companies have decided to decrease their exploration programs.

Exploration for crude oil and natural gas will depend on where prices settle and the reduction in costs.

Will the Organization of Petroleum Exporting Countries (OPEC) stick to its announced reduction in oil production of 1.5 million barrels per day? How will Russia, the number 2 crude oil producer in the world, respond? Will the price decline – about $100 per barrel in less than six months – level off? Will lower gasoline prices put motorists back on the road and increase consumption?  How will the new Obama administration respond? Many questions with no answers.

Alex Mills is president of the Texas Alliance of Energy Producers.  The opinions expressed are solely of the author and do not necessarily represent the opinions and/or policies of the Texas Alliance.

Related Incoming Terms:

Tags: barrel, crued, Down, economic, Gas, Oil, price, recession, slowing