With oil prices, what goes down must come up

John Felmy
John Felmy

Phil Castle, The Business Times

As an economist who’s monitored crude oil prices for 40 years, John Felmy knows from personal experience what goes down must come up.

That’s why Felmy believes slumping oil prices that have saved consumers some money at the pump but also forced energy companies to reallocate resources eventually will rebound.

A sudden interruption in supply in the Middle East or elsewhere could quickly send oil prices back up on a short-term basis. Over the long-term, global demand for oil continues to head one way. “It’s not going to decline by any measure,” says Felmy, chief economist of the American Petroleum Institute, a trade association for the oil and natural gas industry.

Meanwhile, there’s an opportunity for the U.S. energy industry to export some of the increased production of oil and natural gas made possible by technological advances, he says.

Felmy discussed the short and long-term ramifications of energy prices during a wide-ranging interview in Grand Junction with the Business Times.

The issues are important in Colorado, he says, because the oil and natural gas industry in the state by one estimate accounts for more than 213,000 jobs and nearly $26 billion in economic activity.

A variety of factors affect crude oil prices, Felmy says, among them economic growth, geopolitical risks, inventories, production, speculation and weather. But in the end, it all comes down to two things, he says: supply and demand.

Thanks in part to increased production in the United States that’s offset global oil supply disruptions, there’s been ample supply even as demand has slowed, Felmy says. While demand continues to increase, that increased has slowed, he says. And even a small decrease in the pace of demand can lead to large decreases in prices, he adds.

The price for so-called Brent, a major trading classification for light sweet crude oil,  dropped from $99 a barrel in 2014 to a projected $59.50 a barrel for 2015. The price is projected to rise to $75.03 a barrel in 2016, Felmy says.

Lower oil and natural gas prices save consumers on what they spend on gasoline and utilities, Felmy says. If the price of gasoline drops by $1 a gallon, the average household saves about $750 a year. Utility bills can drop by $1,200 a year, he says.

But lower prices also effect the operations of oil and natural gas exploration and production companies, Felmy says. Capital spending for U.S. projects is expected to drop $100 billion in 2015, he says. “That’s a huge change.”

Some companies continue to drill or face the prospects of losing leases, Felmy says. Other companies that need cash flow to continue operations or pay back financing will continue to operate as long as they produce above cost, he says.

Still other companies will move operations and capital investments to more productive areas with lower costs, Felmy says.

Colorado ranks slightly higher than the national average with a cost of $397 a foot to drill wells, Felmy says. Both geology and regulation figure into that calculation.

The cost of drilling is lower at $379 a foot in Texas, $337 a foot in North Dakota and $320 a foot in Montana, he says.

Prices can quickly change, though, with a short-term interruptions in supply whether that’s cause by hurricanes affecting refineries in the United States or a military or political crisis that affects the Middle East, Felmy says. “Supply impacts can happen in a heartbeat.”

Meanwhile, long-term global demand is expected to continue to increase as the developing economies in such countries as China bolter consumer demand for cars and the fuels that power them, Felmy says. By one estimate, global oil demand is projected to increase from about 94 million barrels a day to 121 million barrels a day by 2040. That’s a nearly 30 percent increase, he says.

In the interim, Felmy says there are opportunities for U.S. energy companies to export oil and natural gas.

There’s a mismatch between the light crude oil extracted in the U.S. and the heavy imported crude oil refineries turn into gasoline and other products, he says. This creates an opportunity to export the higher-priced light crude and import the less expensive heavy crude.

There also are opportunities to export natural gas as additional facilities are constructed to liquefy that gas for shipment overseas. One such facility proposed for Oregon would connect by pipelines to natural gas fields in Western Colorado.

One study estimated that the effects of LNG exports in Colorado by 2035 would include 11,366 jobs and $1.8 billion in state income gains.

Ample natural resources and the capability of energy companies to extract them have made the U.S. one of the top energy producers in the world, Felmy says.

A combination of hydraulic fracturing and horizontal drilling has extracted more oil and natural gas from tight rock formations even as deep water drilling has tapped large reserves offshore. Advanced technology and a well-trained workforce also have contributed to the increased production, Felmy says.

Despite low prices for the present, Felmy said the overall outlook for the U.S. energy industry remains upbeat. “It’s an exciting time,” he says.