Tim Leeds Havre Daily News tleeds@havredailynews.com
Gasoline prices in Havre were sitting at about $1.60 a gallon last week just more than one-third of the average at the pump in June and July when prices were well above $4 a gallon. When the drop in prices will stop and what the impacts on state and local economies will be are still unknown. “I think you’re seeing a little lesson now about why oil companies are careful about carrying out expansion on today’s prices prices can change very quickly,” said Patrick Barkey, director of the University of Montana’s Bureau of Business and Economic Research. “This oil decline could be very short-lived ” The impact, at the moment, includes a serious drop in government financing, with the state projecting as much as a $100 million drop in taxes on oil and gas production by 2010 to state and local governments a significant part of the drop in projected budget surpluses for the next biennium, said Terry Johnson, principal fiscal analyst of the Legislative Fiscal Division. Johnson said the drop in revenue so far has primarily been a result of the drop in value as prices go down, taxes go down. It could start having an impact on the amount of oil and gas produced, although no significant drop in Montana has been seen so far. “If prices do continue to deteriorate even further it could have a more serious impact on the production side,” Johnson said. “So far we have held our own on production, but if the price gets too low then it becomes a question of economics.” Local oil and gas producers seem to think current production will continue, with new oil and gas wells planned for 2009, although that, again, depends on what the market does. “It’s just really hard to make any long-range plans when the markets are so volatile ,” Cole Chandler of NFR Energy, formerly Klabzuba Oil & Gas Co., said Friday, Dec. 5. “As of this week we are going to boldly go ahead with our exploration program “As of today, but that’s how volatile it is. I can’t say about next week,” Chandler added. A recent spike and drop in prices With the price of crude oil and prices at the gasoline pumps a major headline item over the summer, prices of crude oil and gas-pump prices started dropping sharply in August. Average prices in the Rocky Mountain five-state region including Montana, Wyoming, Colorado, Idaho and Utah peaked at about $4.10 a gallon, according to the U.S. Department of Energy’s Energy Information Administration, then dropped to $3.83 by the end of August, $2.76 by the end of October and was listed the first week in December at just less than $1.74. Those prices are reminiscent of the prices in the 1990s, when prices averaged right about a dollar and even below a dollar a gallon at some points up to about $1.40 a gallon. During this decade, prices started to climb, with prices ranging from about $1.10 to right about $2 a gallon through 2004. After that prices became more volatile, going from about $2 a gallon up to or just more than $3 a gallon until the spike in prices starting in 2007 and peaking in July of this year. Those prices follow the prices facing producers. After peaking at more than $140 a barrel in July, crude oil prices have dropped by nearly 70 percent, hitting four-year lows last week with a possibility of dropping below $40 a barrel. Following an announcement by the Organization of Petroleum Exporting Countries that they will cut production, expected as much as by 1 million barrels a day following a cut of 1.5 million barrels a day in October, The Associated Press reports that prices rallied in European trading this morning, up to $43.70 a barrel for January sweet crude delivery in afternoon trading. Barkey said the market, as with essentially all commodity markets, is driven by expectations. When traders believe demand will exceed supply a tightMarket prices will stay high and possibly go higher. When, as happened this fall with dropping consumption and the onset of a global economic recession, the demand loosens, prices also drop. “It’s largely driven by future expectations of both demand and supply,” Barkey said. “More accurately, how those expectations change. They obviously can change very quickly.” That translates directly to prices at the pump, he added. When the price of petroleum changes, it impacts the entire retail market and is reflected very quickly. While people can put whatever price they want on a product, that doesn’t mean people will buy it, Barkey said. Gas retailers also need to keep their prices fairly close to what the other retailers are selling the product for, he added. “They don't have a lot of power over what they sell,” Barkey said. “Where lots of people see a conspiracy, I try to put things in perspective.” A drop in demand The demand peaked a year ago, according to information from the Energy Information Administration. Nationally, the consumption of gasoline topped out in July 2007, with more than 200 million barrels more than 8 billion gallons sold. Consumers bought less for every month this year compared to the same month last year and almost every month in 2006 with the last reported month, September, showing a drop from 2007 of 16.663 million barrels, or almost 700 million gallons, to 168.7 million barrels. In the Rocky Mountain Region, the drop was not quite as severe, with most months in 2008 showing a slight increase and a slight decrease in August and September, with 8.296 million barrels more than 348 million gallons sold in the five-state region in September. Barkey said the impacts of a global recession are unknown, but he expects the demand to pick back up. Industrializing nations like China and India are just entering the world of modern automobile use and are likely to continue increasing that demand on gas, he said. “The number of cars expected to be on the road in the next 30 years it’s mind boggling,” Barkey said. Impact on governments and economies Johnson, legislative principal fiscal analyst, said the numbers tell the story of the impact on governments. Johnson said the numbers need to be used cautiously, because they don’t translate directly into impacts on the state government some of the oil and gas production revenue goes back to local governments such as counties and school districts to fund their programs. The average price per barrel of petroleum produced in Montana was $28.03 in the calendar year 2003, Johnson said. That rose to $57.14 by 2006 and is estimated at $89.20 this year. That amount for 2008 includes a spike in the early summer to about $126 a barrel, and the subsequent decline, with some producers now selling oil probably in the $30-$40 range, Johnson said. The fiscal analysis division is projecting a price about $56.37 a barrell in 2010, he said. The impact on revenues follows that, with allowances for the amount of production built in. Johnson said that in Fiscal Year 2002, from July through June, the state collected about $50.3 million in oil and gas production revenues, which does not include the impact of royalties. By 2006 that amount had grown to $203.7 million, and was $324.3 in the fiscal year ended last June 30. The estimate for Fiscal Year 2010 drops back down to $223 million. “About a hundred million dollar drop,” Johnson said. The production side followed the prices, generally. In the calendar year 2003, 19.3 million barrels were produced in Montana, with the total up to 36.2 million barrels by 2006, largely due to production in Richland County with the Bakken oil formation. Johnson said that for 2008 production is estimated at 34.3 million barrels, with estimates for 2010 at 31.8 million barrels. The state also took a hit in revenue while prices were up with fewer people driving, that generated less in gas-tax revenues at the pumps causing concern that the state Department of Transportation might have to delay some road projects around the state. The Associated Press reported Sunday that with about a half-a-percent drop in the amount of gasoline sold through June, the end of the fiscal year, the state lost about $600,000 in gas-tax revenue. About 495 million gallons of gasoline was sold in the state from July 2007 through June 2008. Local production Local companies dealing with natural gas in the Blaine, Hill, Liberty and Chouteau county areas but also in oil in other areas seem to believe they can ride the prices out. Chandler with NFR said no one knows what the future will hold and probably no one knew what the market would do this summer then fall but the spike is not expected to affect NFR’s operations in the near term. “I don’t think there was anybody who could believe it would change so fast,” he said. Chip Minty of Oklahoma City, a spokesman for Devon Energy, said his company is planning to continue its base operations and is looking closely at the commodities market in its planning for new drilling next year. Producing wells are what provide the capital for Devon for new exploration and drilling, he added. “Our existing wells that we are operating within (north-central Montana) we will maintain and continue to operate ,” he said. “We will continue to employ the people that we employ and continue to produce with the wells that we have operating.” Minty said Devon planned with the expectation that the prices of oil this summer were far too high, and is now working with the assumption that prices now are far too low. “It’s difficult to know when it will come back, but we think it will,” he said. Doug Bruner, who operates the Chinook-based Faith Drilling, drilling water wells and virtually any drilling operation needed as well as drilling for petroleum, said his operations will continue. “It doesn’t make us in the oil fields very nervous, but it sure makes our bankers nervous,” he said. “We’re just going to do what it takes to survive.”
