I woke up on July 5 to the realization that the day represented my 40th anniversary in the oil business. On July 5, 1979, I went to work as an accountant for Coastal States Oil & Gas Company after a post-graduation job search that left me with a choice between working in private business or for the Texas State Comptroller’s Office in Austin. In the end, the $150 per month difference in starting salary made the decision for me. It was a decision I would never live to regret.
Much like we see today, the oil and gas industry of 1979 was a political pin cushion, an easy target for politicians and regulators, who often blamed it for problems it did not create, and who enacted “solutions” targeting the business yet did nothing to solve them. Ten months after my first day at Coastal States, President Jimmy Carter signed the incredibly idiotic “Windfall Profit Tax” into law, a tax that was designed to punish domestic oil and gas producers for high oil prices that had been created by two drastic oil embargoes implemented by OPEC.
Since I was the low man on the totem pole, my manager at the time decided I was just the guy to become the company’s internal expert on this worst energy policy in U.S. history. Although I couldn’t know it at the time, the course of my entire career was set: I would spend the next 40 years focusing on and attempting to influence energy policies in various states and Washington, D.C.
I remained a “Windfall Profit Tax” expert throughout most of the 1980s, until the mindless tax was finally repealed in 1988. The sponsors of the original bill had tied the anticipated prices used to calculate the tax to the rate of inflation. When the bill passed in 1980, the price for U.S. crude was around $35 per barrel: That price had collapsed to $15 and even lower by the end of 1984. This tax, whose sponsors had promised would generate tens of billions of dollars to federal coffers every year, generated zero dollars for the final five years it remained in effect.
As I would come to discover, passing really stupid energy-related policies was one of our national government’s main bad habits. The major reason for this is that politicians simply do not understand the nature of the industry, and they invariably make idiotic assumptions when writing their bills, like assuming oil prices will follow the rate of inflation, always rising and never falling.
Politicians also tend to assume really stupid things like the shortages of supply they see today will still exist many years from now. This was the assumption about natural gas that led congress to pass the also-idiotic “Fuel Use Act” in 1978, another bill signed into law by President Carter. This law effectively prevented the building of new power plants fueled by natural gas, which led to a wave of dozens of new coal-fired plants being built in the late 1970s and early 1980s. Half a dozen such plants were built in Texas, home to some of the largest natural gas fields in North America.
The ban on crude oil exports, signed by Gerald Ford in 1976, was based on the equally-stupid assumption that the United States would always have a shortage of crude oil and thus, all the oil we produce here would need to be refined and used here.
Of course, as I would also eventually discover, the bad assumptions made by politicians were often based on bad advice given to them by the industry itself. During 2001 and 2002, I helped lead a national study on the status and future of natural gas production in the U.S. That study involved many of the smartest experts in the industry and the government, and was issued in 2003 at the request of the U.S. Energy Department. Subsequently, it was used by Congress as an authoritative source for the Energy Policy Act of 2005.
The trouble is, pretty much everything our economic models projected in the course of that study has turned out to be wrong. The study projected that the U.S. would be importing in excess of 15% of its daily natural gas needs by now. Of course, we are so awash in natural gas today that various companies are engaged in a rush to build an array of facilities designed to export the commodity to various markets around the world. The study projected a price for natural gas in the U.S. above $5/mmbtu. As I write this piece today, the country’s huge surplus of the commodity has the price mired below $2.40/mmbtu, a price collapse in 2019 due to a chronic over-supply of the product.
Basically, in 2003, we did not fully grasp the magnitude of the shale oil and gas resource in the United States, and neither did anyone else. So, it’s kind of hard to blame the politicians for that particular miscalculation.
I’ve been through four major busts in the oil business: The big one in the mid-1980s; another in the late 1980s that was mainly centered on natural gas; a nasty one in the late 1990s; and, of course, the most recent huge bust that began in late 2014. All of those busts were brought about by major miscalculations by the industry and policymakers about the magnitude of the available resource and the level of demand for it globally.
A good friend in the industry is fond of saying, “You can always trust the oil industry to drill its way out of prosperity.” As this issue of SHALE Magazine goes to publication, I’m beginning to fear that my friend may about to be proved correct one more time. More importantly, it’s looking like crude oil speculators and traders are starting to think the same thing.
Those concerns were heightened when, in the first week of July, oil prices responded to the renewal of U.S./China trade negotiations and the extension the OPEC+ import limitation agreement by falling 6% in three days. Of course, that was the same week that the U.S. EIA announced that domestic oil production had set a new record by surpassing 12 million barrels per day during April, and projected that the U.S. industry would add an additional 1.57 million bpd during the course of 2019.
That projection comes on the heels of domestic oil production rising by 2 million bpd during 2018, which means that, in just two years, the U.S. industry will have increased production by roughly the amount of oil produced by Iraq. This is a path that is simply not sustainable over the long haul.
The EIA further projected that U.S. production could potentially rise to 20 million bpd by the end of 2024, just five years from now. That projection no doubt assumes that crude prices will also remain at fairly strong levels throughout those five years. If my 40 years in this industry have taught me one true thing, it is that such assumptions almost always turn out to be wrong.
Four big busts are plenty for any one man’s career. We should all hope and pray I’m not about to see a fifth one soon.
About the author: David Blackmon is the Editor of SHALE Oil & Gas Business Magazine. He previously spent 37 years in the oil and natural gas industry in a variety of roles — the last 22 years engaging in public policy issues at the state and national levels. Contact David Blackmon at [email protected]