-8 employment would be cut by about 142,000 and supplier industry employment by about 116,000 between 1984 and 1986. Moreover, capital spending cuts in the downstream segments of the industry will cause additional employment losses. A cutback in oil and gas activity not only affects many industries, but also many different states where these industries are located. A 1985 study for API by Battelle Pacific Northwest Laboratories showed that the employment effects of offshore exploration and production are spread across all 50 states. While the response to lower oil prices will be a general cutback affecting both offshore and onshore activity, the information about offshore from the Battelle Study is suggestive of how the employment effects of a cutback are spread across the country. The Battelle Study found that the states listed in Table 2 were the most affected by a change in offshore activity. While some of these states Texas, Louisiana and Alaska are readily identified as oil and gas producing areas, many other states are affected as well. For example, inland states with little direct oil and gas activity such as Ohio, Illinois and Indiana have significant effects from oil and gas activity because their industries supply materials for oil and gas operations. - - Source: Mississippi New Jersey New York North Carolina Ohio Pennsylvania South Carolina Texas Virginia Battelle Pacific Northwest Laboratories, "Economic -10 In addition to reductions in drilling and other oil seeking activity, domestic production already is being impacted by the nagnitude of the recent price decline. Stripper well production is probably most vulnerable to these conditions. A recent survey by the National Stripper Well Association indicates that about 100,000 of the nation's 460,000 stripper wells will be shut in at wellhead prices of $15 per barrel or less. The closing of some of these wells already has occurred, both by larger and smaller operators. Phillips Petroleum, for example, recently announced that it has closed 35 such wells in the Permian Basin, and some small producers have shut down their stripper operations entirely. In most cases it will be uneconomic to ever re-open these wells. Since stripper wells, on average, produce about 3 barrels per day, the closing of 100,000 such wells would reduce domestic oil production by about 300,000 barrels per day. In general, investment to maintain production is likely to be curtailed where such investment yields marginal or submarginal returns. For example, Texaco recently closed 1,500 heavy-oil wells in California. production still is small. But just from the beginning of the year to late February, domestic production already had dropped by about 30,000 barrels per day. The direction of change is clear; only the ultimate magnitude is still uncertain. So far, the total impact on present -11 API has sought to make rough estimates of the impact of the recent decline in prices on domestic production in both the short and longer term. Information obtained from an earlier survey of API member companies indicates these impacts may be large. In the survey, companies estimated the impact of one of the recent tax reform proposals on future domestic production. Information obtained from DRI, Inc. indicates the impact of this tax proposal on oil investment was equivalent to that of a $4 per barrel decrease in price. Utilizing the survey response data and assuming that oil prices will be sustained at a level at least $8 below previous expectations, domestic oil and gas production would be expected to decline the equivalent of almost one million barrels per day within one year, with about half the effect coming from natural gas and half from petroleum liquids. This suggests the decrease in production already observed in 1986 is only the beginning of what will occur. The reduction in oil prices since the beginning of the year is too recent to have had much impact yet on consumption. However, total oil product deliveries in January were up about 1 1/2 percent over the previous year, with especially strong surges in gasoline and jet fuel use. For the month, gasoline supplied was up almost 5 percent while jet fuel rose by over 12 percent. Continued declines in product prices since January almost certainly will stimulate further increases in consumption of these and other fuels. -12 111. Longer Term Supply and Demand Consequences of Low Oil Prices If the recent decline in oil prices is sustained, the longer term consequences likely will be considerably greater than the short term. The API assessment described above indicates that, if an $8 per barrel decrease in price is sustained over several years, domestic production would drop from what otherwise would have occurred by about 2 million barrels per day over five years and by about 3 million barrels per day over ten. These effects alone would have dramatic consequences for future U.S. petroleum imports. As large as these numbers seem, they probably are conservative. First, the drop in average crude prices over the past few months has been more than $8 per barrel. Second, reductions in E&P activity of the magnitudes contemplated are likely to severely disrupt firms and divisions of firms which specialize in such activity and so decrease their effectiveness. And third, the earlier API survey contemplated prices well into ; the $20 per barrel range, where the windfall profit tax meant the federal government absorbed a large share of a price fall. At recent lower price levels, the windfall tax is much less a factor, so that price decreases are absorbed much more by producers. Because of these factors, reductions in domestic production from the recent fall in price could be half again as great as above estimated, or as much as 3 million barrels per day over five years and 4 1/2 million barrels per day over ten. |