March 1999 Vol. 220 No. 3  Editorial

Thomas R. Wright, Jr.,  Editorial Director

It’s not the cavalry

The plight of the U.S. oil producer is prompting several sympathetic politicians and bureaucrats to offer plans and programs to help stem the misery for which there is only one sure solution — higher oil prices. However, the ideas floated, and even introduced as legislation in a few cases, certainly won’t be spurned by producers who need all the help they can get. Others, while well intentioned, could even do more harm than good. Some examples:

• Senator Kay Bailey Hutchison (R-Texas) has introduced a bill in the Senate (U.S. Energy Economic Growth Act) that would allow tax credits to offset the cost of keeping marginal wells on production. The act also would provide for tax exemptions for operators who restart inactive wells. Senator Hutchison says that she has also asked the Secretary of Energy to consider diverting more than 100,000 bpd of royalty oil to the Strategic Petroleum Reserve. This would require the government to take possession of royalty oil produced from government leases and store it in the reserve, thus reducing supply within the market and, presumably, boosting prices.
• Texas Governor George W. Bush has proposed several ideas to help producers, the most plausible being a plan to eliminate state taxes on production from wells that produce less than a given daily rate.
• The U.S. Department of Interior offered a plan that would allow operators of stripper wells located on federal lands to shut in currently uneconomic wells for up to two years without losing their leases.
• Finally, while being careful not to boost expectations, Energy Secretary Bill Richardson made a trip recently to Saudi Arabia for talks. He was supposed to meet with Saudi Oil Minister Ali Al-Naimi to discuss the possible opening of the Kingdom’s E&P operations to foreign oil companies.

While all but the last of these proposals would be of some immediate benefit to U.S. producers, they certainly won’t correct the root cause of the current crisis. Indeed, Richardson’s visit may be the equivalent of throwing gasoline on the fire, since it could potentially lead to an even worse imbalance between supply and demand.

Granted, the major oil companies (and the employees they still have left) are probably chomping at the bit to get a shot at participating in the development of the world’s largest petroleum reserves. And this would be just peachy in the long run. However, in the short term, we can’t imagine anything that would do less for correcting the supply surplus, short of outlawing the internal combustion engine.

The Saudis have severe cash flow problems and are producing nearly flat out, trying to make ends meet. And apparently, things are bad enough that they don’t have the spare cash or technical resources needed to do the additional development they would like. Otherwise, they wouldn’t be entertaining the idea of bringing in outsiders. If this is correct, then it may be better to leave them to their own resources for the time being, with the hope that their production will start to drop. In other words, with the world already over-supplied with oil, why in tarnation would anybody want to help them develop more productive capacity?

This production cut could help. The state-run China National United Oil Corp. last month suspended exports of Daqing crude to Japan, citing low oil prices as the reason, and prompting doubts about Chinese exports to other destinations. In a Financial Times article, a Chinaoil official said the cut was due to a "problem in government policy," and that it will have to be determined "whether it can be resolved later."

Japanese buyers had asked for about 4.2 million bbl or 150,000 bpd of the low-sulfur crude for delivery last month, and if this volume is not made-up quickly from other sources, it could put a minor dent in world crude stocks. Additionally, the contract breach could put into question China’s ability to deliver to other buyers.

The bad news is that the futures-market gamblers either haven’t picked up on this situation yet, or the Japanese had no problem in finding replacement crude. Otherwise, if crude markets were in balance, such a shortfall might result in a price increase of $1.50 per bbl, using a rule of thumb that suggests that each 100,000-bpd swing in supply in a "balanced" market causes a $1.00 price movement in the opposite direction of the imbalance.

The current oil price situation is hitting China just as it is other high cost producers, such as the U.S. In fact, the FT article said a factor in the decision to halt the exports was that the cost of producing the Daqing crude is higher than international oil prices.

All good things end. Most of you who have been reading R. W. Scott’s "Editorial Comment" for almost 30 years will be disappointed to hear that his column this month (see page opposite the inside back cover) will be his last. We certainly are. Admittedly, there will also be one or two of you who will be glad to see him go, considering the few letters we received over the years objecting (sometimes vehemently) to his opinions. Incidentally, a letter arrived just last month in which the writer demanded that we cancel his (free) subscription in protest to something that Bob wrote.

Over the years, Bob has been a keen critic of politicians of all persuasions, and depending upon which party he was jabbing at the time, he’s been accused of being a sympathizer to the opposing party. However, one of the strangest reactions to a single column came when two letters showed up, one of which accused him of being a fascist, while the other labeled him a communist. He’s also been known to call environmentalists an unflattering name or two.

But whether or not you agreed with him, you did read his columns regularly (at least according to our reader interest surveys). And if he wasn’t entertaining you, he was at least making you think. We will continue to work to keep you informed and, hopefully, interested in how we view what’s going on in the oil business. However, World Oil will never be the same without Bob Scott.

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