Correction: This story incorrectly stated what ban the United States lifted in December 2015. The U.S. lifted its ban on crude oil exports. This story has been corrected.
The last year is proof that oil prices are going to do what oil prices do: Seesaw back and forth like a flickering flame of volatility.
The price of West Texas Intermediate Crude was $70.98 per barrel in July 2018. The forecast for the benchmark crude for July of this year is $55, according to data from the U.S. Energy Information Administration.
During that time, the price per barrel of WTI dipped as low as $44.48 in December and bounced back as high as $76.40 in October.
One difference, based on recent market reactions, is that the country’s efforts to increase production and become a major exporter have served to insulate the effects of geopolitical events that in the past might have wreaked havoc on prices.
“Geopolitical events still have the biggest impact on the industry,” said Tom Seng, applied assistant professor of energy business and assistant director of the School of Energy at The University of Tulsa.
“Just last week we had U.S. versus Iran and U.S. versus China. Those are things that spook the market.”
Mounting tensions with Iran had a bullish effect on markets while trade talks with China seem to have bullish results one day and bearish the next.
Since the U.S. lifted its ban on crude oil exports in December 2015, it has increased production to more than 12 million barrels per day, putting the country on par with Saudi Arabia and Russia — the three countries combine for about 30% of oil production.
One of the byproducts of the U.S.’s increase in oil production and exports is that it shields most of the country from price spikes from events that in the past might have really hit consumers.
“Yes the prices are being impacted, but the populace of the country isn’t being seesawed as we could if we weren’t producing the amount of oil we are producing,” Seng said.
Explosions on two oil tankers in the Gulf of Oman last month could have ultimately resulted in spikes at the gas pump. But because of increased reserves and domestic production, the U.S. is less vulnerable to such events, Seng said.
“We have more energy security then we ever have in the past,” he said. “As we can produce more, we will produce more than the demand will increase, and that will make us more secure and increase our share of the markets on a global standpoint.”
Planning for volatility
Oklahoma has lived and died with oil prices over the years. After decades of being hamstrung by boom and bust cycles, state government has begun diversifying away from its heavy reliance on oil. In the 1980s, gross production tax accounted for as much as 30% of the state’s general revenue. That’s now down to about 5%.
Sen. Roger Thompson, R-Okemah, chairman of the Senate Appropriations Committee, said the state budgeted for oil to be at $54.23 per barrel for this fiscal year.
That amount is determined by the Tax Commission, which uses economists from area state universities who base their predictions off the global market.
Late last year when prices dipped to $50 and below, the state was able to offset that with increased sales tax revenue.
“In times past, we’ve been able to see prices dip and (energy companies) start laying people off and your car sales go down and purchases go down and that hits the sales tax,” he said. “The dips in November and December were not long enough to have much of an impact on the budget.”
Local production companies also have to plan for volatility in oil prices.
Rick Muncrief, CEO of WPX, said the Tulsa-based exploration and production company believes crude will trade between $50 and $65 per barrel for the rest of the year and has planned on the lower end.
For 2019, the company has about two-thirds of its production hedged at $53 per barrel and for 2020, one-third is hedged at $59.
The company hedges a percentage of its production to insulate itself from market fluctuations. If the price comes in at the low end, the company still profits. If oil prices are higher, it will determine whether to reinvest, pay down additional debt or buy stock back.
“We are not at $100 (per barrel) and thinking we will never have a poor day again, and we are also not at $35 or $40 and thinking about survival,” Muncrief said. “We’re in the mid part of a cycle, and I think it’s a really good time to invest.”
Ever looming on the horizon is the eventual decline of fossil fuels and the continuing emergence of alternatives and renewable energy sources.
As the U.S. appetite for fossil fuels declines in the coming decades, global demand will not, Seng said.
Instead, growing foreign demand will offset the decline in U.S. consumption.
The Energy Information Administration projects that by 2050, one-third of U.S. electricity will be produced by various alternatives and renewables. The vast majority of power will be generated from natural gas, which is a cheap, clean fuel that is a natural byproduct of oil production and is in abundance in Oklahoma.
“That was kind of staggering for me,” Seng said. “It’s a much better outlook for natural gas than I would have expected.
“Natural gas will sustain the way we live as wind and solar grow, and slowly and surely they will overtake natural gas the way natural gas took over coal, but that isn’t going to happen overnight.”
Room for growth
The U.S. is producing record amounts of oil currently, and there is still plenty of capacity left.
Look at the number of drilled, but uncompleted wells.
There are 8,283 wells, as of May 2019, that have been drilled but are not complete. That’s up more than 51% from the 5,455 in September 2016.
In the past, drilled but uncompleted wells were mostly the result of low-price environments, meaning wells that didn’t make financial sense to produce from were drilled anyway so a company could retain its lease.
The present increase has more to do with a lack of infrastructure. In the Permian Basin in west Texas and southeast New Mexico, for instance, more than 3,900 wells are drilled but uncompleted.
“Almost everything revolves around infrastructure,” Seng said.
Several projects are underway to increase the output from hot spots like the Permian and connect those products to export hubs, be it the shipping of crude overseas or transporting natural gas to Mexico via pipeline.
Magellan, a Tulsa-based midstream company, has $1.25 billion in expansion projects underway including projects to expand its transportation, storage and distribution services. The company is also considering a new pipeline from Cushing to Houston and an expansion of its Saddlehorn pipeline.
As projects like this come online, the amount of oil produced in the country could potentially increase to 13 million to 14 million barrels per day.
“If we are producing that much, you would expect to see a softening in prices, but if we could have the corresponding ability to increase our exports, then we won’t see that affect the price,” Seng said.
Correction: This story originally misstated the status of plans for new and expanded Magellan pipelines. The story has been corrected.
WPX Energy's 260,000-square-foot tower will be built on the block of property where the old Spaghetti Warehouse was located.