The drastic drop in crude oil prices in 2015 and 2016 have had a significant impact on the small businesses that make up the Kansas oil and natural gas industry. But low crude oil prices are not the long-term story or trend.
Many oil and gas companies in Kansas and elsewhere cut capital expenditures by 75 percent-80 percent in 2015. Some oil and gas service companies have laid off as much as 50 percent or more of their workforce and some producers have laid off as much as 20 percent-25 percent of their workforce. The oil and gas industry makes significant investments in developing human resources and agonize over workforce loses. Oil production in Kansas fell by 5.5 percent in 2015, but a much larger decline can be expected in 2016 if oil prices stay low. Oil production decline generally lags oil price collapse as producers work to maintain production and improve operating efficiencies.
As a result of low oil prices, the industry experienced a 70 percent drop in drilling rig count and a 68 percent drop in drilling permits issued in 2015. In addition, oil and gas severance tax collections by the State of Kansas and property tax collections by counties dropped dramatically.
The economic effects are everywhere. Oil and natural gas play an integral role in nearly every aspect of our lives. With over 6,000 products produced from petroleum, much of our high standard of living can be traced to the use of petroleum. Nearly every person uses some product from petroleum in their daily lives. If you think about all the associated service and supply companies that support the oil and gas industry combined with the consumer spending impacts of oil and gas industry payrolls, you begin to get a picture of the enormous impact of the oil and gas industry.
The longer oil prices remain low, the oil and gas industry will continue to constrict. In turn, considering the economic impact of the oil and gas industry, that would be detrimental for the economy as a whole. While we may enjoy lower gasoline prices, lower gasoline prices do not compensate for collapsing capex and rising unemployment in the U.S. economy.
Production rollover could be sooner and more severe than anticipated. Production decline rates accelerate when capital is taken away. Low oil prices have accelerated production declines and a supply/demand could be reached, perhaps later this year.
Low crude oil prices are not the long-term story or trend. The price of crude oil will recover in the future and the oil producing characteristics of Kansas uniquely positions the State for a bright energy future. Over the last decade, market forces have spurred massive amounts of new oil and natural gas production. Oil and natural gas supply 63 percent of U.S. energy consumption today. President Obama’s Energy Information Administration (EIA) estimates that 25 years from now fossil fuels will account for nearly 80 percent of our country’s energy consumption. The International Energy Agency (IEA) projects that by 2040, world energy demand will increase by 45 percent and nearly 60 percent of that demand will be supplied by oil and natural gas. Oil is expected to remain the number one source through 2040 followed by natural gas and coal.
The men and women of the oil and natural gas industry reject the stale mindset of last century’s thinking peddled by some that oil and natural gas production and environmental stewardship are not compatible. From 2000-2012, the oil and natural gas industry spent more on low and zero carbon technologies than the federal government and nearly as much as all other industries combined. According to the EPA, methane emissions from the oil and gas sector have fallen by 38 percent since 2005 including a 73 percent drop in methane emissions from wells since 2011. Our nation’s carbon dioxide emissions are at 20-year lows.
Affordable, reliable energy is essential to our economy because energy powers everything that makes modern life possible. We need smart energy policies that promote our nation’s energy position as a leader in energy production. We need tax reform solutions that don’t compromise our ability to grow the economy. We need a regulatory approach that invites input from industry and bases rulemakings on sound science, legitimate cost/benefit analyses, and economic impact. We must abandon policies driven by a zero-sum game philosophy for energy that says we must have less oil and natural gas so that we can have more of something else. The American public and future generations deserve better.
Edward Cross is the president of the Kansas Independent Oil & Gas Association. He can be reachded at kiogaed@gmail.com.
