FOREIGN POLICY - Meanwhile, in Oil Patch USA

By Margaret Kriz, National Journal
© National Journal Group Inc.
Saturday, March 13, 1999

	      The complex and fickle politics and economics of the 
world market for oil can sometimes make for stark contradictions 
at home. Consider, for instance, two recent hearings on Capitol 
Hill, both about oil. 
	     At the first hearing, Richard L. Morningstar, special 
adviser to the President for Caspian Basin diplomacy, painted an 
upbeat picture of U.S. efforts to promote development of massive 
new oil and gas fields half a world away in Central Asia. 
	     Tapping those fields will ''bolster the energy security 
of the United States and our allies and the energy independence 
of the Caspian region by ensuring the free flow of oil and gas to 
the world marketplace,'' Morningstar told the Senate Foreign 
Relations Committee. 
	     He noted that three U.S. agencies will use their special 
financial instruments to help back construction of pipelines to 
transport Caspian oil through friendly countries. ''We ask 
Congress to work with us . . . to allow these agencies to be as 
flexible as possible,'' Morningstar said. 
	     On the other side of the Capitol, a far different scene 
was played out before House lawmakers. S. Michael Cantrell, a 
third-generation Oklahoma oilman, was warning the House Ways and 
Means Committee that America's domestic Oil Patch is suffering 
the worst economic crisis since the Great Depression. 
	     ''Oklahomans are proud people,'' said Cantrell, owner of 
the Oklahoma Basic Economy Corp., in Ada. ''Many of us stayed 
through the horrible oil crash of the mid-1980s. But this crisis 
is deeper and has gone on longer than the bust of '86.'' 
	     Today's plummeting petroleum prices are forcing an 
increasing number of small U.S. oil companies--which are 
relatively high-cost producers--out of business. Since late 1997, 
oil prices have sunk from $ 18 per barrel to $ 10 per barrel in 
December 1998. Along the way, 6,000 Oklahomans have lost oil jobs 
and an additional 1,500 are joining the unemployment rolls every 
month. Nationwide, 46,300 American oil and gas industry jobs have 
been lost since 1997, according to the Independent Petroleum 
Association of America. 
	     The United States is struggling to reconcile these 
contradictions with a bifurcated oil policy--helping to develop 
new sources abroad while helping keep alive domestic producers at 
home. But this is no easy task; the unavoidable fact is that 
pumping oil in other countries is simply cheaper and more 
profitable. 
	     ''The economics are such that the domestic industry 
simply can't operate some wells at a profit, so it's going to be 
in tough shape, no matter what the federal government does,'' an 
oil industry lobbyist said. ''I don't think anybody wants to see 
price controls or the kind of government intrusion into the 
marketplace that it would take to preserve all aspects of the 
domestic industry.'' 
	     Energy Secretary Bill Richardson, in an interview with 
National Journal, made clear he would do what he could to help 
smaller domestic producers, but that he wasn't going to go as far 
as trying to move oil prices. The Administration is seeking to 
''enhance our energy relationships with producing countries,'' he 
said. ''Energy security means security at home and abroad. We 
recognize that the independents are going through hard times. But 
these are cyclical problems, and we see upward trends. We're 
trying to mitigate their pain and help them a bit, but we're not 
going to mess with prices.'' 
	     The low prices are especially hard on Oil Patch companies 
that are pumping from so-called marginal wells, which produce 
fewer than 10 barrels of oil each day. America's 500,000 marginal 
wells produce 20 percent of our domestic oil, or about 1.3 
million barrels a day. That's as much oil as the U.S. imports 
each day from Saudi Arabia. 
	     But the costs of maintaining those marginal wells are 
high--so high that they outpace the prices the marginal-well 
owners can charge for their oil. Rather than go into debt, 
domestic producers have closed down 140,000 small wells since 
late 1997. Another 180,000 wells are likely to be shut if prices 
don't go above $ 14 per barrel in the next six months, according 
to industry estimates. 
	     Once closed, those wells aren't likely to be reopened, 
said IPAA President Gil Thurm. ''Some people think oil wells are 
like a light switch, and you can switch them off and come back in 
a couple of years when the price is better,'' he said. ''That's 
not the case.'' Abandoned wells lose the pressure needed to pump 
oil and are often capped with cement, or flooded, making them 
prohibitively expensive to reopen. 
	     To help keep those wells operating, the Energy Department 
has teamed with the Small Business Administration to streamline a 
loan guarantee program for domestic crude oil producers. 
Richardson said the Administration is also considering tax 
credits for marginal-well producers. The White House has already 
announced several other programs, including measures to divert 
some domestic oil to the Strategic Petroleum Reserve and to 
extend the leases of small producers on federal lands. Congress, 
too, is considering an array of tax- and royalty-relief proposals 
for the domestic Oil Patch. 
	     But oil industry analysts worry that with an increasing 
number of U.S. independents and high-cost oil producers going 
bankrupt, fewer sources of oil will be available if world oil 
demand increases and prices rebound. That could leave the United 
States even more dependent on overseas oil producers in 
politically unstable regions, and hence more vulnerable to a 
sudden price hike caused by a crisis abroad, said Constantine D. 
Fliakos, managing director for Merrill Lynch & Co. Inc's 
securities research division. 
	     ''America is the world's largest user of oil and natural 
gas, and we do not want to get into a situation where we are 
relying solely on foreign governments to let us have oil,'' the 
IPAA's Thurm said. ''In years past, people in this country were 
very concerned about the long gas lines and high cost of 
gasoline. Well, they haven't seen anything yet if America loses 
its ability to produce oil.'' 
	     Independents charge that foreign oil-producing countries 
are flooding the world market with cheap oil to put the small 
American producers out of business. They note that in December 
1997, top officials at the Venezuelan national oil company called 
for lower world oil prices to force U.S. domestic oil producers 
out of business and to discourage investment in deep-water Gulf 
of Mexico oil exploration. 
	     Cantrell and other wildcatters also oppose the United 
Nations program that allows Iraq to sell oil to buy food and 
medical supplies. They contend that the humanitarian aid is not 
reaching the public and that Iraq's oil is further depressing 
already-low international oil prices. 
	     As they see it, federal policies that increase petroleum 
production in oil-rich regions abroad are hurting American 
independents. ''What I don't understand is why the U.S. 
government is compelled to aid and abet the foreign seizure of 
control of the local energy marketplace,'' Cantrell said. ''Some 
will say it is not prudent for Congress or the Administration to 
interject itself into the 'free market.' Frankly, I have come to 
scoff even at the term.'' He noted, for example, that tankers 
shipping cheap oil from the Middle East enjoy the protection of 
the U.S. military. ''There is no level playing field for U.S. oil 
field workers,'' Cantrell said. 
	     But energy analysts argue that the Caspian oil fields 
will be developed with or without U.S. assistance. ''It's a 
question of, does the U.S. want to be involved or not,'' said oil 
industry analyst George Beranek of the Petroleum Finance Co., a 
Washington-based consulting firm. 
	     Most analysts attribute today's unprecedentedly low 
prices to the 1997 decision of the Organization of the Petroleum 
Exporting Countries to increase oil production to meet the rising 
demand in Asia's booming markets. That demand dried up when 
Asia's economy went into a tailspin, and world demand fell even 
further when South American markets followed with their own 
nosedive. Then too, the United States experienced record-high 
winter temperatures in 1998, depressing heating oil sales. 
	     While they disagree on the cause, all oil industry 
officials concur on the outcome: Low petroleum prices have helped 
buoy the American economy, but are killing the domestic 
independent oil industry. 
	     As oil analyst John H. Lichtblau said at a January Senate 
hearing: ''Whatever action is taken, it should be kept in mind 
that while the present price collapse is temporary, it may last 
long enough to do permanent damage to the (domestic) oil 
industry.''