The Outlook for the Oil Industry

Abstract

D URING I927 the petroleum industry added to storage approximately 64 million barrels of oil, representing an excess of supply over demand of 7 per cent. This marginal surplus caused a depreciation in gross income for the oil business in this country, as compared with I926, of upwards of $6oo,000,000, and has given the oil companies a year of lean to vanishing profits and, incidentally, something to think about. The primary cause of this striking decline in values was the competitive and uneconomic application in the Seminole field of Oklahoma of a brilliant and recently developed engineering tool the gas-air lift with the result that the rate of production was doubled or trebled, three or four years' normal output compressed into one year, and an indigestible surplus of gasolinerich crude oil thrown on the market. In retrospect, it is becoming apparent that this new engineering technique, designed to lower production costs and increase yields, was economically misapplied at a cost to the petroleum industry of over a half billion dollars. Someone has characterized this incident as the Seminole Follies. During the past 7 years, stocks of oil have expanded I98 per cent, from I96 million barrels at the close of I920 to 584 million barrels on December 31, I927. In fact, oil in storage has increased in volume every year since I9I8, with the exception of I926 when inventories were slightly reduced. Just as I927 was marked by the application of a new phase of production engineering, so the preceding years were characterized by two outstanding technological developments of far-reaching consequences: the perfection of the art of cracking, whereby gasoline can be manufactured cheaply from fuel oil; and the rapid development of the science of geology, facilitating the discovery of new oil pools and, more latterly through the growth of geophysical methods, permitting the location of hidden structures in advance of drilling. In reviewing the course of prices during this period, one is impressed by two characteristics of the petroleum price cycle: prices were laggard in declining whenever supply began to exceed demand, while quotations were quick to advance upon the slightest tendency of demand to outdistance supply, even though the latter change might be (as it often was) merely seasonal. Inherent in this price habit was a considerable element of speculation both in respect to crude oil inventories and oil shares. As a result of such price movements, the momentum of supply was subject to recurrent periods of stimulation, in the face of growing stocks and improving technology bearing upon supply. It has been said of this period that the industry gambled on an oil shortage and lost. It therefore appears that the petroleum industry has been passing through an era of unprecedented, and even revolutionary, advances in technology, without a corresponding progress in the art of economic control. The reasons for this lack of progress in economic prescience go back to a number of ideas that time has proven to be unsound: the illusion that the storing of crude oil is a profitable undertaking; the dogma that an oil lease under no circumstance should be permitted to suffer physical drainage; the idea that extremely high prices are just around the corner ready to compensate for all the competitive excesses of the moment in short, thinking based upon incorrect premises and giving rise, under competitive stress, to unsound business practices. The oil man has not yet learned to think in terms of dollars instead of barrels. A few examples of the lack of economic foresight may be adduced from current practices as symptomatic of the situation. Last summer an operator in West Texas acquired a vacancy permit on a strip of acreage 300 feet in width, crossing a major oil pool. A well was started, which in turn gave rise to nearly ioO wells, with the result that these wells, at the close of I927 were producing 5o,ooo barrels daily, largely going into steel storage constructed to receive it. No one familiar with costs and price trends can clearly foresee a price movement adequate to pay out the cost of producing and storing this oil. In July a discovery well was drilled in the