Industry Will Survive Double Whammy of Tight Credit and Falling Oil Prices
Oct. 18, 2008 | By Don G. Briggs, President – LOGA

Crude oil prices closed this past Thursday at $69.85 per barrel, marking a 52% decline in crude prices since surging to a record high of $147 on July 11. The decline followed the Energy Information Administration’s report saying crude stocks rose by 5.6 million barrels in the past week, well over the expected increase of 3 million barrels. Gasoline prices are following crude prices dropping from near $5 a gallon to an average price this week of $3.15.

The record high prices of three months ago have certainly caused consumers to cut back and tweak their driving habits. If you add to that the collapsing banks and world stock markets in freefall, we can easily see why prices are continuing on a rapid decline. The big question is “Where is the bottom”?

OPEC made a decision last month to cut production by 520,000 barrels a day hoping to slow the decline in prices, which, to their dismay, did not make a dent in oil prices. On Thursday of this week OPEC announced it was moving up their emergency meeting planned for mid-November to next week, October 24, to discuss the steep price decline. I will not be surprised to see OPEC cut production by 1.5 million barrels per day.

Sixty dollars a barrel seems to be the number that panics OPEC members as well as others. Phil Flynn, energy analyst at Alaron Trading Corp. in Chicago, said, “If they come in and cut production and oil falls to $60, they’re going to look like they’ve lost control, which they have. They’re panicking.” OPEC members have become accustomed to $100+ oil and have budgeted their national spending accordingly and will face substantial shortfalls with lower prices. Ecuador’s oil and mine minister is quoting an ideal figure of $80 per barrel.

What is on all of our minds is how will Louisiana’s economy fair with the banking crisis and declining oil and natural gas prices? Of course low gasoline prices are a blessing for consumers, especially in a time of economic recession. However, our local economy for the most part, is driven by the oil and gas industry. Tight credit coupled with low crude and natural gas prices are a double whammy for industry.

The oil and gas industry is a “price driven” industry. Simply put, high oil and natural gas prices create more drilling activity, low prices – less drilling. With $50 per barrel oil and $5 mcf gas, exploration will most likely pull back. However, long-term projects such as in the deep waters of the Gulf of Mexico will continue to be developed. Since deepwater projects are planned out seven to ten years, this is good for our industry’s service sector which has seen their stocks decline by 45% in the past four weeks, according to Oil Sector Index.

Producers with big budgets can rely on cash flow to finance projects, and won’t be crippled by frozen lending markets. Some producers in recent years have borrowed to develop their drilling projects and will have to tighten their belts by lowering their exploration budgets and selling off some of their assets.

Unlike the ups and downs the oil and gas industry has experienced in past years, the decline in prices and demand will be short lived. The industrialized economies of China and India will, in short time, eat away at any surplus, thus driving prices back up. In the U.S. there are 2 people for every 1 automobile, in China there are 20 for every 1 automobile. Eventually, China’s growing demand is going to "catch up” to the United States or at least close the gap. There is no supply readily available to support that growth. Louisiana’s energy based economy will continue to develop the oil, natural gas and alternative resources with which she has been blessed.