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January 23, 1981
Drilling Boom
The U.s. oil and gas industry in recent years
has shown that it responds to the incentive of
higher prices. Drilling activity apparently set
a new record in 1980, according to preliminary data for the year, and thereby surpassed
previous highs reached in the mid-1 950s.
During the January-November 1980 period,
the industry drilled nearly 54,500 wells of all
types-about 21 percel1t above the comparable 1 979 figure. Total footage drilled was up
1 8 percent, and the number of drilling rigs in
operation was up 35 percent, in comparison
with the 1 979 pace of activity. Petroleumindustry expenditures for drilling equipment
and services reached record highs-bringing
prosperity to drilling-equipment manufacturers and suppliers, exploration companies,
and drilling contractors.
Soaringprices
Domestic drilling activity actually has been
rising sharply ever since fuel prices began
rising in the wake of the 1973 Arab oil embargo. The number of new wells more than
doubled over the 1 973-80 period, rising at a
1 5-percent annual rate before accelerating
even further in 1 980. This uptrend in drilling
activity represented a direct response to a
sharp price uptrend: domestic wellhead
prices of crude oil and natural gas rose fivefold and seven-fold, respectively, over the
1 973-80 period (see chart).
Actually, domestic oil and gas prices remained far below free-market levels during
this period, because they were subject to a
complex system of Federal controls. In the
absence of controls, these prices would have
been based on the landed price of imported
fuels of comparable quality, because of producers' heavy reliance on foreign sources to
supplement domestic production. But Federal controls prevented wellhead prices from
reaching world-market levels, and thus reduced the financial incentive for domestic
producers to increase drilling activity.
Nonetheless, the price incentive increased
substantially over the 1 973-80 period -even
with controls. The average domestic price
for oil rose from $3.89/barrel in 1973 to
$9.00/barrel in 1 978, and then soared to an
average $21 .00/barrel in 1 980. The wellhead
price for natural gas rose from $0.22/thousand cubic feet in 1973 to $0.91 in 1 978 and
then to $1 .46 in 1 980. (The 1 978-80 increases alone amounted to 133 percent and
61 percent, respectively.) Moreover, the use
of average prices understates the incentive for
exploration activity, because under the control program, newly discovered oil and gas
received more favorable treatment than other
. categories.
The 1 978-80 acceleration in domestic wellhead prices reflected two major factors: first,
the upsurge in imported-fuel prices resulting
from the tight world-supply situation created
by the Iranian revolution, and second, the
Federal government's decision to perm it domestic prices to move gradually to worldmarket levels. In June 1979, the Department
of Energy initiated a program to phase-out
controls on domestically-produced oil by
October 1 981 . Similarly, the Natural Gas
Policy Act of 1 978, passed late that year,
called for the gradual removal of controls on
most domestically-produced gas by the end
of 1 984.
In the case of oil, the windfall profits tax has
removed some of the added revenue that
producers othelWise would have gained
through gradual decontrol. But even after the
imposition of that tax last May, producers
realized substantially higher returns than in
the preceding year.
The level of drilling activity reflected the price
trend not only during the 1 973-80 period, but
also during the 1 956-73 period, when domestic prices remained nearly stable because
of strong competitive pressures from lower-
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In 1 979, however, the surge in drilling finally
began to bear fruit. Gross additions to crudeoil reserves amounted to about 2.2.;.billion
barrels, the highest figure since 1971 . Although proved reserves still declined, the
drop amounted to only 0.8-billion barrels,
the smallest amount since 1968. The natural-gas industry reported similar promising
results.
priced foreign oil. Drilling activity dropped
steadily during that earlier period, so that less
than one-half as many wells were dri lied in
1973 as at the 1 956 peale
Reflecting that earlier downtrend in drilling
activity, domestic crude-oi I production
peaked in 1970. Although drilling activity
subsequently picked up, production trended
downward through most of the following
decade-except for the 1 977-78 period,
when Alaskan North Slope oil came on
stream, and again during 1 980, when the
uptrend in drilling activity showed signs of
paying off. Domestic production of natural
gas followed a roughly similar pattern over
the past several decades.
Throughout the 1 973-80 period, the domestic industry concentrated its drilling efforts in
traditional producing areas-mainly Texas,
Oklahoma, Kansas and Louisiana. This is
evident from the fact that development wells
increased from 69 to 78 percent of all wells
drilled over that period, whereas exploration
wells dropped from 22 to 19 percent of the
total. (Development wells are those drilled
within the proven area of a reservoir, whereas
exploration wells are those drilled to discover
either new fields or new reservoirs in proven
areas.) The remaining 3 t04 percent of the
total included service wells drilled to enhance recovery at old fields, through the injection of water, steam and chemicals.
Impact of reserves
Unfortunately,
drilling activity has
not translated into an increase in "proved"
reserves. Proved reserves are the known oi land-gas resources considered recoverable at
current prices and with current technology.
They constitute the working "in the ground"
inventory of the oil-and-gas producing industry. Proved reserves increase whenever additions to reserves during a given period exceed
that period's production.
Exploration activity nonetheless expanded
sharply in the 1 973-80 period-with
the
most active new areas being the Overthrust
Belt of Utah and Wyoming, the Williston
Basin of North Dakota and Montana, the
Appalachian region, and the Tuscaloosa
Trend in Louisiana. (Exploratory drilling was
relatively light in Alaska, despite the great
promise of that area, because of restrictive
Federal land-use policies.) Offshore drilling
also increased sharply, especially in the Gulf
of Mexico. But to date, the Federal government has offered only about 4 percent of its
offshore lands for lease, and challenges by
environmental groups have forestalled drilli ng on some of those tracts.
Proved reserves of both oi I and gas have declined almost steadily since reaching a peak
in 1967. (The one exception was 1 970, when
North Slope reserves were officially added to
the national totals.) Despite the downward
trend in production since 1 970, the domestic
oil-and-gas industry has consistently added
less to reserves than it has extracted, and the
decline in the stock of proved reserves actually accelerated in the 1 975-78 period.
During that recent period, proved reserves
dropped at an average annual rate of 1 .6
billion barrels, reflecting average production
of 2.9 billion barrels and average additions to
reserves of 1.3 billion barrels annually. Duringthe 1 971 -74 period, in contrast, proved
reserves dropped at a much smaller (1 .2billion barrel) rate, reflecting a much stronger
addition to reserves during that period.
Resourcepotentials
Industry analysts are widely divided about
future production prospects, although most
agree that increased drilling activity will not
forestall an eventual decline in production.
2
----------Some contend that production wi II trend
upward over the next several years, while
others argue that insufficient reserves wi II be
added even to sustain current production
over the 1 980-85 period. These differences
reflect widely varying estimates of undiscovered resources and of the potential for enhanced recovery from known reservoirs.
through the use of advanced-recovery techniques. Even at the lower end of these estimates, the addition of these resources to
current proved reserves could supply the
. nation's
needs for 36 years at current production levels.
According to U.S. Geological Survey (1 975)
estimates, undiscovered crude-oil resources
(on and offshore) range between 50 and 1 27
billion barrels, while undiscovered recoverable natural-gas supplies range between 322
and 655 trillion cubic feet. Another 30 billion
barrels of oil and 200trillion cubic feet of gas
may be recoverablelrom known fields
But these resources are less accessible, and of
poorer quality, than current proved reserves.
If such resources are to be developed, higher
energy prices (or lower taxes on oil production) will be required to encourage the necessary investments in enhanced recovery
methods, offshore drilling, and other costly
technologies.
Yvonnelevy andAlaneSullivan
14
12
DOMESTIC Oil AND GAS PRICES
80
10
60
8
.....
40
6
Natural Gas·:.4
........
-.--_.--_._._--.------
20
*Prices: oil in dollars per barrel, and natural gas in cents per 1 ,000 cubic feet.
**Prices in 1 980: $21 .00 for oil and 146.6 cents for natural gas.
3
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BANKINGDATA-TWELFTHFEDERAL
RESERVE
DISTRICT
(Dollar amounts in millions)
SelectedAssetsandliabilities
LargeCommercialBanks
Loans (gross,adjusted)and investments*
Loans(gross,adjusted) - total#
Commercial and industrial
Realestate
Loansto individuals
Securitiesloans
U.s. Treasurysecurities*
Other securities*
Demand deposits - total#
Demand deposits - adjusted
Savingsdeposits - total
Time deposits -total#
Individuals, part. & corp.
(Largenegotiable CD's)
WeeklyAverages
of Daily Figures
MemberBankReserve
Position
ExcessReserves(+ )/Deficiency (- )
Borrowings
Net free reserves(+ )/Net borrowed(-)
Amount
Outstanding
1/7/81
147,482
124,990
37,657
50,416
23,919
1,364
6,777
15,715
47,287
33,671
28,273
74,054
64,390
28,843
Weekended
1/7/81
n.a.
180
n.a.
Change
from
12/31/80
204
332
94
350
62
17
137
9
-2,400
542
431
328
147
792
Weekended
12/31/80
n.a.
122
n.a.
Changefrom
year ago
Dollar
Percent
7.5
10,228
10,408
9.1
12.2
4,100
6,751
15.5
517
2.1
264
24.0
361
5.1
181
1.2
446
1.0
434
1.3
524
1.8
14,956
25.3
14,149
28.2
6,920
31.6
Comparable
year-agoperiod
69
30
38
* Excludestrading account securities.
# Includes items not shown separately.
Editorialcommentsmaybeaddressed
to theeditor(WilliamBurke)or to theauthor.... Freecopiesof this
andotherFederalReserve
publications
canbeobtainedbycallingor writingthePublicInformationSection,
FederalReserve
Bankof SanFrancisco,
P.O.Box7702,SanFrancisco
94120.Phone(415)544-2184.
\illW2C[JI
@FedFRASER