It was an easy thing to miss, but U.S. production of crude oil in April was higher than its level the same month a year earlier. It was easy to miss because production overall continues to decline.
The year-to-year production increase, first since 1991 gains related to the Persian Gulf war, was significant because it highlights U.S. possibilities. It gives needed perspective to the view that what remains of the mature U.S. oil resource isn't worth developing.
INVESTING IN THE RESOURCE
The year-on-year April production gain shows that the resource still holds economic potential. American Petroleum Institute attributes the 0.3% increment to projects at Prudhoe Bay, the Santa Ynez Unit off California, and the deepwater Gulf of Mexico. It resulted, in other words, from investment in the resource.
Indeed, this minor landmark in oil flow follows a broader rebound in U.S. exploration and development investment by large companies. Spending by 30 companies surveyed by Arthur Andersen & Co. SC totaled $12.5 billion in 1994, up 8% from 1993 and 20% from the recent low of 1992. While non-U.S. E&D spending for these companies still exceeds the U.S. figure, it has fallen each year since 1991.
Apparently, U.S. ventures are becoming more appealing in comparison with ventures elsewhere. Having run into problems in places like Russia, Yemen, and Algeria, companies have good reason to approach international frontiers with growing caution. To the extent pioneering international ventures lose their shine, prospects in the U.S. and other stable producing countries become more attractive.
In fact, U.S. ventures are gaining value in absolute as well as relative terms. Technological advances are shrinking costs and improving the economics of upstream work.
Reflecting the trend, the Arthur Andersen survey showed that the cost of replacing reserves from all sources in 1994 averaged $4.40/bbl of oil equivalent in the U.S., lowest since the recent peak of $5.65/bbl in 1991. This is the hallmark of modern upstream economics: Oil field profitability can improve even if prices don't.
In the U.S., then, falling costs are restoring profitability, which is attracting investment. In turn, rising investment is slowing the decline rate for U.S. crude production, which in the first half of last year averaged 3.6%/year. Rising investment won't soon reverse the decline. It will never make the U.S. self-sufficient in oil. But it turns a natural resource into wealth, which means money cycling through the economy and taxes flowing to governments.
The federal government should welcome this production news. Yet the government in recent years has treated oil production as something to discourage. The attitude seems to have been that the resource is mature, so why encourage production if it's going to decline anyway?
So much for that nonsense. But the question deserves an answer. The government should increase production because it creates jobs, incomes, and tax revenues. April's tiny gain occurred because companies had access to the resource and rising hopes for profits.
WHAT GOVERNMENT CAN DO
The government affects both of those crucial parameters. It can encourage oil and gas production by leasing more federal land and by easing tax loads on producers. Royalty relief for marginal, deepwater production in the Gulf of Mexico, passed by the Senate this month, is an example of what can be done. But the government can do much more. It's a question of how seriously it wants to create jobs, raise incomes, and broaden the U.S. tax base.
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