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However, oil price drop means drilling activity, tax revenue down

Consumers enjoying low gas prices at the pump

Low oil prices resulting from the Asian financial crisis and other factors are giving U.S. consumers the lowest gasoline prices at the pump in history when adjusted for inflation. But the continuing slump in oil prices is sobering for oil producers in Mississippi, and is causing concern for other businesses such as shipyards specializing in deepwater oil drilling rigs.

“We just go from bad news to worse news,” said Joe Sims, president of Mid-Continent Oil and Gas Association, which represents producers, transporters, refiners and suppliers. “Gas prices adjusted for inflation are sobering and fascinating at the same time. And while the consumer is enjoying low energy prices, it is really dire for the industry in the short term. And who knows when it is going to turn around? Companies both large and small are struggling to cope with the conditions, and we`re all hoping that it is going to get better before it gets worse.”

While the consumer is benefitting from low prices for gasoline and natural gas – since the price of one petroleum product affects the other – low oil prices are affecting drilling activity, royalty revenues, and state tax revenues from oil and gas production.

“We would say that oil prices are artificially low because it is one of the most valuable commodities we have,” Sims said. “It drives everything. And so people who are drilling wells are going out, spending the money, taking the risk, and seeing the price for their product drop 30% to 35% since 1997.”

Sims said the industry needs about $18 per barrel to be profitable. Currently oil is trading at about $13.30 per barrel, and many Mississippi producers receive far less than that. Depending on the type of crude oil, the price paid to Mississippi producers can be between $2 to $8 less than the average price on the commodity market.

“Obviously this is sobering,” Sims said. “What you hear in the industry is that companies and individuals who don`t have lease obligations are putting any new drilling prospects on the shelf. So it is going to have an effect on any new drilling in Mississippi and Alabama onshore and offshore. Companies with large budgets aren`t going to drill. Small companies aren`t drilling until the economic conditions are better.”

Drilling activity in Mississippi is down. Currently 771 drilling rigs are active in the state, compared to 1006 drilling rigs active during the same period in 1997.

Sims said less drilling activity and lower prices for oil affect royalty income, sales tax revenues, income tax revenues, severance tax revenues, and small business revenues. “It kind of works its way through the economic chain of events,” he said.

“The collapse in crude oil prices, which began late last year, has seriously eroded our worldwide exploration and production earnings,” said Chevron chairman and CEO Ken Derr. “In June of this year crude oil prices fell to their lowest levels since 1986. Our second quarter average U.S. crude oil realizations were about $5.50 per barrel lower than last year`s. For the first half of 1998, these prices were almost $6.50 per barrel lower than the same period last year.”

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