Queensland, US (BBN) – In retrospect, the oil downturn hit Wyoming fast.
The sector began to slide in 2015 as higher-than-average prices slipped. Production initially continued as companies tried to make up for the declining prices. But earnings became losses, and the cascade of cutbacks led to layoffs and bankruptcies, according to a featured story of Star Tribune.
The trifecta of oil, gas and coal taxes provides the lion’s share of state revenue. Most people in Wyoming understand that commodity markets are just as likely to have busts as booms.
Yet built into the phrase “boom and bust” is the promise of an end to hard times. If you tighten your belt, you can reach the finish line, and then things will improve.
But weathering a downturn is not so simple. The oil price is steady but not stellar. Unemployment numbers have stopped falling, but employment hasn’t risen. Some producers are starting to drill again, but a hobbled service industry can’t keep up with the demand.
The question remains: Just when will this bust be over?
A CHANGING FRAME OF REFERENCE
It’s hard to define the end, except in retrospect, said Edie Holmes, operations manager for the McMurry Group. Mostly, it’s about price.
Producers don’t use the terms boom and bust as liberally as those outside the industry, she said.
Companies are likely to carry on much as they do in the boom times, crunching numbers and considering profitability in various plays. It’s a numbers game, always, Holmes said.
Producers refer to a band of profitability, a price range favorable enough for companies to work with depending on where they are drilling. That band has changed since the recent downturn.
“Nobody would have said that $50 oil prices were good for production without having gone through what we went through in the past year,” said Rob Godby, an economist at the University of Wyoming’s School of Energy Resources.
It was the great heights and the deep lows that made this steady price favorable to a few.
A bust is really a decline from what’s considered normal, whether that is in production or price, Godby said. Unfortunately, there is no rule of thumb for where oil price or production should be. It’s fluid, he said.
From 1997 until 2014, the state’s revenue from oil increased every year, except for a blip during the recession. That’s not to say that prices were skyrocketing. They were relatively stable.
However, through most of that time, production was sliding annually in Wyoming. It fell year by year.
It wasn’t the markets that changed. It was technology, which offered greater efficiency and new ways to harness the oil hidden in the slimmest of seams.
Production soared, contributing to record highs of 2014, the global glut and the resulting bust.
THE TROUBLE WITH PREDICTIONS
Most observers agree that the days of $100 a barrel oil are not in the immediate future. But most also agree that a gradual increase in price will take place in the next few years.
The Energy Information Administration projects that the price will hit $70 a barrel before the end of the decade. That price should fall well within the profitable band for Wyoming. It’s close to the $80-plus norms set in the last 10 years.
Still, there is uncertainty.
“It’s a global commodity, and as such, to be able to predict exactly what winds may sway the market is extremely difficult,” said John Robitaille, vice president of the Petroleum Association of Wyoming.
Any number of factors could change the projections, Godby said. A conflict in the Middle East could reduce supply, driving up demand, or economic growth in developing countries could increase demand, leading to the same result.
On the flip side, if global demand falls, so does the price. If developed countries move away from oil because of environmental concerns, oil will suffer, he said.
However, some of those who deal with dollars rather than rigs are more confident in a rise.
“Crude oil is on track for its biggest annual gain since 2009,” said Phil Flynn, senior analyst at Price Futures Group, in a client note Friday, comparing the current lows with those of the late 1990s. “That set the stage for an eight-year rally.”
But while projections influence hopes and guide expectations, they don’t necessarily affect the way people do business.
When the EIA or Wall Street analysts change forecasts for the price of crude, companies don’t change their operations to meet that projection, said Holmes, of the McMurry Group. Day-to-day work for producers is fairly consistent and straightforward, she said. Companies are looking at the micro data that influences the price of oil and the cost of drilling.
“Oil conditions are improving, and I think that is all that anybody can say,” said Godby. “Will they go back to where they were three years ago? I think you would have to be pretty optimistic to say that.”
But they will eventually rise, he said.
For lawmakers in Wyoming, the end of the downturn signifies a return to robust funding streams. That could take time.
The CREG report, a projection of revenue for the state released in October, predicts oil prices below $50 up to 2022. It’s a conservative and unpromising figure.
But projections have been wrong before.
No one predicted the geopolitical scenario that led to the current bust, Godby said.
OIL AND POLITICS
Recently OPEC, the cartel of oil-exporting countries, agreed to reduce production in an attempt to steady the price.
It’s worked in the past, and the price of oil has benefited in the last few months — first as talks were promised, then as handshake agreements were made.
OPEC has done this before.
Before the bust, Saudi Arabia had withheld production for years to keep the price high, but it shifted policy when the U.S. began to gobble up the open share of the market, said Godby, the UW economist.
“We go through these price cycles that are political as much as anything else,” he said.
However, some say the U.S. should be a growing power in the geopolitical sphere that affects oil.
The market analyst, Flynn, recently took issue with OPEC’s decision to omit the U.S. from its production talks.
“I believe OPEC is underestimating once again the U.S. energy producer,” Flynn said. “While they may have won the recent price war, in the long term, the U.S. producer must be reckoned with.”
Certainly any expansion, whether of U.S. exports or the U.S. share of the international supply market, would be seen as a good thing for producers, said Robitaille, of the petroleum association.
“Anytime we can expand a market for any product, it absolutely benefits the producer,” he said. “If we do come into a situation where we are able to expand the opportunity for production to go outside of the border, I would say that would correlate with a better price, which would then indicate more production.”
In one aspect, Wyoming is much like Russia, Saudi Arabia or Venezuela. Those countries rely on the industry as much as the Cowboy State does, and they, too, are hurting from the low prices.
There are signs that some producers are returning to work in the state, and as prices and drilling creep forward, the Wyoming economy may be stretched thinner still.
No one is sure when the bust will end precisely, or what that market will look like. However, from producers to analysts, most observers agree on one thing: It will get better.
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