Although prices are lower than they were four years ago, oil is continuing its rebound after dipping below $30 per barrel in 2016, according to industry experts. Increased value per barrel and geopolitical factors are translating into increased drilling, production and market share for United States oil companies.
“More potential sites have become economically viable because of the rise in crude oil prices,” Chris Lafakis, director at Moody’s Analytics, said. Much of this investment has occurred in the U.S., he noted. And that is because of the shale reserves that can be tapped at low, break-even cost, and they don’t require a lengthy amount of time to come online.
West Texas Intermediate (WTI) crude oil prices closed at $74.15 on June 29, while crude oil extracted from the North Sea known as Brent prices closed at $79.44, according to the Nasdaq. The spread between WTI and Brent prior to increased investment in U.S. shale patches was about $3 per barrel, Lafakis explained. The increase in this gap was caused by a small glut relative to global supply and demand, he said.
The spread between the price of WTI and crude oil being produced in the Permian Basin, which is located in West Texas and Southeast New Mexico, is even greater than the gap between WTI and Brent. Lafakis said the disparity is due to the fact that infrastructure in the Permian Basin has not kept up with the rate of production growth. Additional infrastructure – particularly pipelines – over the next couple of years will increase producer profitability at these shale patches by relieving the current infrastructure bottlenecks, which should close the price gap, Lafakis added.
“We actually expect prices to stay pretty close to where they are right now throughout the remainder of the year,” Lafakis said. “But there are some significant risks that are associated with that forecast.”
Politically, Lafakis explained, there is uncertainty related to how aggressively the Trump administration will push for oil sanctions on Iran. He said sanctions could lead to a decline of about 400,000 barrels per day in Iran beginning in November, depending on how many countries are on board. Additionally, there is an anticipated production increase in Saudi Arabia and Russia, and a decrease in Venezuela. Between production increases and decreases, Lafakis said that, as the marginal producer of crude oil, the U.S. would make up for any deficit in production relative to demand.
Rock Zierman, CEO of the California Independent Petroleum Association, noted that increased production is not always the best indicator of whether or not the oil industry is strong, due to the fact that it is a depleting industry.
New wells sometimes merely replace production lost from older, depleted wells, Zierman explained to the Business Journal. “When folks are spending capital to go out and drill new wells, that’s the most important factor in economic activity, rather than whether or not there is an actual increase in production,” he said.
In California, 100% of oil produced is sent to refineries in the state, according to Zierman. Despite state production, California imports about 70% of its oil to keep up with demand – a small portion from Alaska but the majority from the Middle East, Zierman said.
Over the last three years, there has been much transition in the global oil industry, such as bankruptcies and mergers. However, Zierman said industry players should be more stable as activity and the number of new projects increase. There have also been a number of changes in regulation for the oil industry over the last few years, he explained, including those related to idle wells and injection wells. These regulation changes have increased cost, but Zierman said the industry is comfortable with the process and what is expected of them.
With regard to natural gas, Lafakis said there is not much to report, adding that the industry is kind of “boring.” The amount of natural gas produced by crude oil production flooding the market is keeping prices low, he explained. Increased exports of U.S. natural gas will take the edge off of extra supply, he noted, but prices are expected to remain flat, below $4 per million British Thermal Units.
Leader, Los Angeles Basin Operations,California Resources Corporation
The City of Long Beach and its residents benefit directly from recent strengthening in global oil markets, thanks to the city’s unique partnership with the State Lands Commission to operate the world-class Wilmington Field. California Resources Corporation is proud to support the city’s operation of the largest field in the Los Angeles Basin through our sustained capital investments, project labor agreement, local hiring and community outreach. The city’s energy production reflects its commitment to sustain a diverse and inclusive economy that provides educational and career opportunities across commercial, industrial and tourism sectors.
The City of Long Beach is also doing its part to address California’s chronic dependence on energy imports, which accounts for over half of the net energy imports into the entire United States. California currently imports over 70% of its crude oil, 90% of its natural gas and nearly a third of its electricity. Furthermore, most of the billions of gallons of oil Californians consume annually come directly from foreign countries that do not apply California’s safety, labor, environmental or human rights standards. Given Californians’ enormous need for energy as the world’s fifth-largest economy, the City of Long Beach and CRC are ideally positioned to continue supplying reliable, affordable and responsibly produced energy for years to come.
President, Western States Petroleum Association
Oil and gas industry operations in Long Beach and the surrounding region will continue to be essential contributors to California’s energy mix, employment picture and economic foundation for the foreseeable future. The visible benefits of a healthy petroleum industry include the $148 billion in direct economic contributions, 142,000 good jobs, $40 billion in labor income, and billions in tax revenues we return to our state.
But that is just part of the tremendous range of our industry’s beneficial impact on hundreds of local communities statewide. These indirect benefits reach deeply into the economy, improving opportunities and the lives of millions of individual Californians who may not even realize it.
We invest billions into local communities like Long Beach, where we live and work, buying goods and services from local businesses that generate thousands of additional jobs beyond those we provide directly in oil and gas operations. Virtually every industry sector in every city and community – from agriculture, entertainment and education to health services, entertainment and food services – relies on petroleum to function and do business. This supports hundreds of thousands of jobs of all kinds and produces nearly $40 billion per year in indirect economic activity.
The Southern California region alone, including Long Beach, accounts for nearly half of the total direct and indirect economic contribution of the oil and gas industry contribution to California and 78,000 direct and indirect jobs.
We’re also increasing our ongoing efforts to engage effectively, cooperatively and productively with local communities like Long Beach where we do business. We want to address specific needs, concerns and issues to identify new ways to enhance local quality of living, or simply provide new opportunities that improve individual lives.