The recent spurt in crude oil prices should help U.S. oil and gas producers in their quest for federal relief. Simple survival isn't the issue that it was for many producers just a few months ago. Those pressures having subsided for the moment, the industry can put its problems in the perspective of interests the government should not ignore.
The main problem for producers, of course, is that much U.S. oil output loses money when the price of West Texas Intermediate crude falls below $15-16/bbl. Public policy implications of this problem are manifest in shut-in wells, which represent people no longer at work, profits no longer earned, and taxes no longer paid. Shut-in wells usually cannot be reopened even though most penetrate rock layers that still contain oil and gas. In a mature producing region such as the U.S., slumps in the price of crude create many such economic tombstones.
Maybe the crude price will never again fall below $15-16/bbl. But it probably will. And each time it does, producers will shut in wells, cancel jobs, and pay fewer taxes to governments. This dimension of the crude price cycle helps no one.
DISCUSSING SOLUTIONS
The Clinton administration and a large group of lawmakers have acknowledged the public policy aspects of the problem and discussed reasonable and feasible solutions. The proposal most helpful to economically marginal, onshore production--and the associated jobs and taxes--is tax relief phasing in as crude prices fall and out as prices rise.
In this solution, everybody wins. Producers have help riding out price slumps and are able in times of higher prices to plan investments with some measure of confidence. Consumers do not have to forgo benefits of low prices. And taxing authorities have the promise of future tax receipts to compensate for reduced or suspended levies in periods of low prices. That's certainly better than what governments can expect from shut-in wells.
Of course, some lawmakers can't find room in their agendas for anything that helps oil producers. They complain about revenue losses and portray tax relief as a subsidy for oil production. Neither claim makes sense. Tax relief that preserves the tax and employment base raises government revenues over time. It represents not a subsidy but a prudent investment.
DEEPWATER ISSUE
The same arguments apply to exploration and production in deepwater tracts of the Outer Continental Shelf, another relief measure under discussion. Like marginal production onshore, some potential exploration and development projects in deep water are economic only when oil and gas prices are on the high side of their recent ranges. Conditional tax and royalty breaks can cushion the price troughs enough to let projects on the economic precipice move beyond the planning stage.
For both marginal onshore production and deepwater offshore work, there is room for dispute over where the government should set price thresholds and how much revenue it should yield when prices drop below them. But the basic question of whether to extend relief to producers during price slumps should be easy to answer. At stake are jobs, domestic economic activity, and future tax revenues. With congressional adjournment approaching and no dear legislative vehicle at hand, prospects for a relief bill this year have begun to fade. But that can change if enough lawmakers come to view the issue not in terms of producer survival but of clear public economic and fiscal interests. A period of strengthening prices should help producers put these interests on the forefront. It won't last forever.
Copyright 1994 Oil & Gas Journal. All Rights Reserved.
