This page addresses the causes for OPEC's difficulties and the 1997-1998 drop in crude oil prices and the cost and pricing problems faced by Independent Producers. 

Update: OPEC fall 1999 meeting:
OPEC's balancing act and the impact of Y2K -9/21/99

Spring 1999 Market Share within OPEC  One of the most frequent questions WTRG receives is "Why doesn't OPEC just cut production? They will increase total revenue." This article explains one of the major problems OPEC faces each time it meets. The third in a series on crude oil pricing issues.

More about crude oil prices and the impact of oil price changes on various segments of the industry can be found at WTRG's Oil Price History Page.  If you need help determining the impact of crude prices on your company please contact WTRG Economics.

OPEC met November 25-26, 1998 in an attempt to reverse the decline in oil prices.  This meeting was a total failure for OPEC.  They even failed to extend the current quotas past the June 1999 expiration date. The only point of agreement was to hold another meeting in March, 1999.

A year earlier OPEC had another failure when it approved a 10 percent quota increase at a time when the Asian economies were entering a prolonged slump. As a result OPEC is experiencing the lowest prices for crude oil, after adjusting for inflation, since the pre-Embargo days of 1972.
 

Saudi Arabia has not forgotten the cost in loss of market share in the first half of the 1980s. As a consequence, the Saudis, Venezuela and Iran are temporarily locked in a battle that will leave all OPEC countries short on cash for at least a few more months.

Perhaps the best chance for OPEC is a cold winter in the short term and a rapid Asian recovery in the longer term. It would not be the first time increased demand solved OPEC problems. Maybe it will again.

November 30, 1998

In the last update we discussed, among other things, lifting or production costs and finding costs for various regions of the world. This issue will concentrate on the situations faced by U.S. producers. In particular we will concentrate on the independent producer.  For those of you not familiar with the term, independent generally applies to a producer of oil or gas which does not also own downstream facilities such as refineries, gasoline or diesel distribution, or retail stations.

That update pointed out that a survey of 24 of the larger U.S. oil companies indicated that on the average it cost $4.48 to "find" a barrel of oil and $4.12 to produce it. That means there is no profit for this group below $8.60 per barrel and no positive cash flow from operations below $4.12 per barrel.

Of course the average for these companies and the reality for many other companies are quite different. Average production costs are just that - averages. Many oil fields have much higher costs. In some cases, as much as four times the average.

I had a call a some time ago from a small independent producer who said he could survive two more months at current prices. It has been two months. In another part of the U.S. another independent had reduced its workforce by 20 percent and shut in 50 percent of its production. Any further reduction in production would cause significant damage to the reservoirs. This company reduced lifting cost to $8.00 per barrel, but is only receiving an average of $6.80 per barrel. How long can you stay in business losing $1.20 per barrel? As the operations manager for this company stated, "It is very likely that we will see more independents sell out or close the doors soon."

Most people watch crude prices through the NYMEX or IPE window, but neither the NYMEX price nor the IPE price is the price that producers receive.  The price that a producer receives is heavily influenced by location and quality, and in almost all cases the price is significantly less than the prices quoted on the various exchanges.

To better understand the producers dilemma let's look at a year end snapshot. On December  29th IPE February Brent closed at $10.61 and NYMEX February light crude closed at $11.70. On the same date one of the major crude oil marketers was offering to purchase crude for as little as half that amount.
 

To put these prices into more familiar terms. A crude oil producer on the low end is receiving $4.65 per barrel or 11¢ per U.S. gallon. On the high end they received $9.00 per barrel or 21.4¢ per gallon. Milk producers do much better than that and they don't have to pump their product thousands of feet to get it out of the reservoir.
 

Companies have been laying off less experienced lower paid workers, but the cuts are now moving up the experience ladder. If prices do not recover soon the industry will lose valuable human capital. Thus the producers dilemma: lose talent, lose reservoirs or lose the business? In many cases, it will be all three.

January 29, 1999

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More about crude oil prices and the impact of oil price changes on various 
segments of the industry can be found at WTRG's Oil Price History Page.