Help for U.S. producers

U.S. oil and gas producers will surely welcome whatever help might emerge from the federal government in this period of market crisis. And producers elsewhere will surely watch developments with more than casual interest.

American Petroleum Institute reports wellhead crude prices in the U.S., adjusted for inflation, to be at their lowest level in 50 years. Fortunately for producers, natural gas prices aren't that low. A recent turn toward cold weather in the U.S. has helped.

The struggle

Producers are struggling, nevertheless. Small companies face bankruptcy. Companies of all sizes are laying off key professionals, which as recently as a year ago they were scrambling to hire. The families of tens of thousands of oil industry workers face uncertainty and disruption.

There should be no question about the appropriateness of federal help to an industry wracked by a market crash. The precedent is set.

Congress last year approved $6 billion for emergency disaster relief and market-loss payments to farmers atop regular aid worth $7 billion (OGJ, Jan. 11, 1999, p. 28). For a steel industry hurt by cheap imports once destined for Asia, the Clinton administration plans to propose tax credits worth $300 million over 5 years. Neither of those businesses has faced anything like the misnamed windfall profit tax, which soaked oil producers for $77 billion while in effect during 1980-88.

Basic fairness makes it proper for the government to help oil and gas producers. The only question should be the nature of assistance.

Energy Sec. Bill Richardson, after declaring at a National Petroleum Council meeting that "We at the Department of Energy are on your side," discussed tax and regulatory relief plus resumed purchase of crude for the Strategic Petroleum Reserve. These are reasonable approaches. And they can be defended against charges that they would cost too much in "lost" tax revenues. The revenues are already in jeopardy.

Taxpayers have a financial stake in hydrocarbon production threatened by currently low oil prices-as they do in farm production, basic manufacturing, and other tax-paying activities. Many financially troubled oil wells would never be reopened if shut in now. The royalty and tax revenues that they would generate in future, healthier markets thus would be lost. Oil-producing states understand the effect. Some of them are acting to preserve their petroleum tax bases.

All governments should base assistance on a clear view of the problem. A basic bias toward supply destabilizes the modern oil market (OGJ, Jan. 11, 1999, p. 23). It keeps cheap energy available to consumers and economies but creates huge vulnerability to demand swings. The market chokes on surplus now because of a surprise slowdown in demand growth occasioned by Asia's economic collapse. A general slump in commodity values magnifies the price effect. And the essential supply response amounts to commercial brinksmanship: Who cuts production, and by how much? Hence the worldwide interest in whether the U.S. government acts to protect U.S. production.

Economic problem

For their parts, producers should recognize the limits on what governments can do. This is an economic problem, not a political one. There's too much oil immediately available relative to demand. Prices will stay low as long as that's the case. The government can take some oil off the market with low-cost purchases for SPR, but it won't mean much unless it buys the oil from producers in deepest distress. It can ease tax and royalty loads while prices are low. And it might find ways to cut costs of complying with various types of regulation. But it can't solve the basic problem.

Eventually, low prices will provide what the market needs: more demand and less supply. In the meantime, producers seeking relief in order to survive should continue avoiding discussion of anything that would thwart a demand recovery. It's their best hope.