CONOCO: ANOTHER OIL PRICE PLUNGE NOT LIKELY

Changes in the oil market make a repeat of the 1986 crude oil price crash unlikely. Volatility and uncertainty will continue, says John Sauer, chief energy economist of Conoco Inc. But, thanks partly to spot and futures markets and a new outlook by members of the Organization of Petroleum Exporting Countries, there will be "less of the massive changes we have seen before," Sauer told the International Association of Geophysical Contractors annual meeting last week in Houston.

May 20, 1991

4 min read

Changes in the oil market make a repeat of the 1986 crude oil price crash unlikely.

Volatility and uncertainty will continue, says John Sauer, chief energy economist of Conoco Inc.

But, thanks partly to spot and futures markets and a new outlook by members of the Organization of Petroleum Exporting Countries, there will be "less of the massive changes we have seen before," Sauer told the International Association of Geophysical Contractors annual meeting last week in Houston.

IAGC also heard warnings that an Environmental Protection Agency proposal could disrupt seismic operations in the U.S. and this year may be the oil and gas industry's last chance for a while to gain access to the Arctic National Wildlife Refuge Coastal Plain.

MARKET VOLATILITY

Sauer said futures trading helped the oil market adjust to the supply disruption created by Iraq's invasion of Kuwait last August.

Futures prices for crude due for delivery 12 months in the future remained well below spot prices, which shot up as traders and refiners worried about near term supplies in the absence of Kuwaiti and Iraqi exports.

That reversed the usual pattern, called "contango," in which distant futures prices exceed immediate spot prices to reflect inventory carrying costs.

"Markets encouraged no buildup in inventory," Sauer said.

In previous supply crises, when there was no significant futures trading, the tendency to hoard added an element of demand, aggravating the strain on supply.

In the latest crisis, the discount of distant futures prices to the spot price created an incentive to draw down inventories, which supplemented the replacement supplies that came on stream from Saudi Arabia and other producers.

Futures markets can aggravate near term price volatility, Sauer said. But, together with spot markets, they are 11 constructive in the long term."

The Conoco economist predicted crude prices of $20-27/bbl through the 1990s, with "a considerable amount of volatility around that range."

There is less spare productive capacity now than there was in the mid-1980s, Sauer pointed out, nearly all of it controlled by members of OPEC. And OPEC is unlikely again to have one member determined to increase its market share with the rest resisting-the-situation that led to the 1986 price crash.

"OPEC producers realize how much they have to lose," he said, citing the revenue losses OPEC members have experienced from past overproduction (see chart). An oil price of $27/bbl would provide the group revenues slightly greater than it received in the mid-1970s.

Oil prices in the forecast range will help natural gas find markets, Sauer predicted. In the power generation growth market, "gas is cheap" relative to competing fuels when capital and operating costs are taken into account.

WARNINGS

The EPA move that might hamper seismic operations is addition of explosives to the list of hazardous substances subject to "right to know" provisions of the Comprehensive Environmental Response, Compensation, and Liability Act.

EPA indicated in a notice of proposed rulemaking it might make the move, reported Bob Lowe of Western Geophysical, chairman of IADC's government relations committee.

If it does, geophysical contractors might have to notify state and local emergency action groups when they plan to conduct seismic surveys with dynamite.

The requirement would increase paperwork, create delays, and otherwise complicate permitting.

Mark Savit, an IAGC lobbyist, said EPA's notice wasn't clear about requirements. The agency might publish its notice of proposed rulemaking this fall.

IAGC is opposing the move and will seek an exemption for seismic operations if EPA does include explosives in the right to know requirement.

The ANWR Coastal Plain warning came from C.i. (Pete) Silas, chairman and chief executive officer of Phillips Petroleum Co., who noted that the Persian Gulf war focused public attention on U.S. overdependence on Middle East oil.

"But the nation's attention span is short," he said. "unless we get a decision (on ANWR leasing) this year, we may not get another chance until another crisis hits America between the eyes."