Consumers are enjoying low prices at the gas pump. In fact, after being adjusted for inflation, gasoline prices are at an all-time low. But while the gas consumer is gleeful, the volatile oil prices are putting the oil and gas producing industry in Mississippi in a difficult circumstance.
Recently prices have been as low as $13.50 per barrel, the lowest price in 10 years. There was a dramatic decline in January, and since then prices have recovered to about $16.50 per barrel.
State Tax Commission figures for the past twelve months, from February 1997 through January 1998, show that oil production has increased by 8.4% from 16,901,000 barrels in 1996 to 18,335,000 barrel in 1997. However, there was an average price decrease of 18.9% over that time period that resulted in a 12% decrease in severance tax revenues. For the time period in 1996, $18.8 million was collected compared to $16.5 million in 1997.
That was offset by an average increase in natural gas prices of 4.7%. Production also increased 5%, which gave a 10.4% increase in natural gas severance taxes. About 92 million cubic feet (MCF) of natural gas was produced for the time period in 1996, compared to 96 MCF in 1997. Revenues for 1996 were $9.2 million compared to $10.1 million in 1997.
Joe Sims, president of Mid-Continent Oil and Gas Association, which represents producers, transporters, refiners and suppliers, said that several factors have combined to produce the present slump in oil prices:
• A mild winter reduced demand for oil and natural gas.
• Too much oil is being produced by OPEC and other oil producing countries.
• The downturn in the Asian economy has led to reduced demand.
“Most of last year we had a real bullish market as oil and gas demand was climbing,” Sims said. “Then we had a mild winter and problems with the Asian economies. Supply and demand is the basis for price. Winter consumption plays into future supplies and prices. If we have a mild winter we aren’t taxing the availability of natural gas or heating oil, and it is more or less a buyer’s market because there is no pressure on supply.”
Mississippi impacts from the lower oil prices include less drilling activity, reduced revenues for mineral owners, and reduced severance tax collections for counties which have oil production activity.
“The state loses some economic activity if prices remain low,” Sims said. “I think people are hopeful something will happen in the markets, and it has moved up slightly the last week or so. In the past week or so several exporting countries agreed that there is a problem, and that we need to reduce world production. So that has had a positive impact on markets. It has climbed up some, but it is still volatile. And it is having an effect on drilling.”
Sims said 15 drilling rigs were operating in Mississippi March 6 compared to 32 drilling rigs in 1984. In 1988, 320 wells were drilled in Mississippi compared to 147 in 1996.
“There are two distinct economic impacts from lower production activity,” Sims said. “Drilling affects sales tax income and employment. If you have production, there is an effect on income and severance taxes. If you aren’t actively drilling, then drilling contractors and service contractors are affected. Plus mineral owners get accustomed to people knocking on their doors, and counties participate in severance tax income.”
Three-dimensional seismic equipment is used to determine which underground areas are most likely to produce, and sales taxes are paid on the contracts. So a $1-million contract for three- dimensional seismic work produces $70,000 worth of sales tax.
“And that is just seismic expenditure,” Sims said. “That is just the tip of the iceberg. The effect of the oil price has got people in the industry questioning where it is going to stabilize.
If you have a prospect where you don’t have a lease obligation, you simply put it on the shelf and maybe bring it back when you feel the economic climate is a little better. And, of course, that hurts Mississippi.”
Sims said oil producers believe that natural gas and petroleum products are a commodity that are greatly under appreciated in this country. “You can’t very well maintain your job and your standard of living without gasoline and all the byproducts,” he said. “Gas is not available unless someone has gone out and taken the chance of finding gas. During the oil embargo in the 1970s we realized gas was unappreciated. If you can’t pull up to the pump and get gas, you can’t maintain your standard of living and your job. So for the price you pay, it is certainly is a bargain today for consumers.”
Sims said producers are looking to oil exporting countries, principally Saudi Arabia, in hopes that they will find a way to prop up oil prices. “Our industry can operate fine if we were getting roughly $18 to $20 per barrel,” Sims said.