Full text of Energy Highlights : January 1983

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DALLAS
Federal Reserve Bank of Dallas

January 1983

Drilling Increase To Continue?
The U.S. rig count began an upward
climb in the last week of October that
has continued through the last report
in December. As of December 24, 2,768
rigs were active. This turnaround
follows the greatest rotary drilling
decline in U.S. history, during which
the rig count plunged from a high of
4,530 on December 28, 1981, to a low of
2,379 on October 18 of this past year.
Despite recent increases, the year-end
rig count remained 38.9 percent below
the final count in 1981.
The November monthly average U.S.
rig count of 2,499.8 was 4.1 percent
over the October low of 2,401.5. The
December figure of 2,695.8 showed a
7.8 percent monthly growth. Impending
lease expirations and tax advantages
have traditionally spurred drilling at
year-end, but seasonal factors alone
cannot explain the current comeback.
On a seasonally-adjusted basis, the rig
count still rose 7.4 percent in
December and 2.7 percent in
November.
Energy prices cannot explain the rebound. Gas producers now have difficulty finding attractive contract
prices for newly-drilled gas supplies.
And on the world oil market, the glut
and the threat of a price break continue. Furthermore, in early December
the major oil companies reversed a
move they made in early September,
and withdrew the $1 increase in the
prices they pay for crude oil at
domestic refineries.

An unusually large number of
impending lease expirations may explain some of the activity, but the major factor appears to be softer prices
and increased productivity in drilling
services. A fixed budget can support
more drilling now than in late 1981 and
early 1982. And since drilling costs are
now lower than can be expected if oil
prices were to rise again, some current
drilling may be substituting for future
drilling. But without an oil price
recovery, the oil drilling comeback is
unlikely to continue. Gas drilling continues to languish, despite the drop in
drilling costs, because gas producers
face a very difficult time marketing
new supplies.

While the uptick in oil field activity is
evident in Texas, continued doldrums
in natural gas drilling-particularly
deep gas-are evident in Oklahoma.
On a seasonally adjusted basis, the
Texas rig count fell only 0.1 percent in
October. It increased 6.9 percent in
November and 9 .3 percent in
December. Meanwhile the Oklahoma
rig count continued dropping, declining a seasonally-adjusted 18.0 percent
in October, 4.4 percent in November,
and 0.3 percent in December.
The January U.S. rig count must
have an average above 2,654.1 to
evidence a seasonally-adjusted increase over December.
-Stephen P. A. Brown

Changing Price Expectations Cloud
Energy Industry Outlook
The current worldwide glut
characterizing the oil market has
severely depressed the U.S. energy industry. Drilling rigs in service are 40
percent below the December 1981
level, and domestic oil producers have
been forced to discount prices. Continued recession in Europe and the
United States and the failure of
OPEC's members to agree upon a
satisfactory means to share cuts in
production suggest further problems
for the U.S. oil and gas extraction and
services industries.
One of the major effects of the oil

glut has been a revision of price expectations. Before the glut, oil prices were
expected to rise faster than inflation.
Experts now forecast declining real
(inflation-adjusted) oil prices through
1985. As a result, marginal projects
deemed profitable before the
downward revision in price forecasts
are now less attractive investments.
Persistence of the glut, which has
generated the decline in oil prices, can
be traced to changes in the market
shares of oil producing countries.
While total oil production has declined
(Continued on back page)

This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org)

Chart 1
RATE OF CHANGE IN SEASONALLY
ADJUSTED U.S. RIG COUNT

Chart 2
MONTHLY OIL PRODUCTION

10.0 PERCENT

25 MILLION BBLS/DAY

7.5
20

NON-OPEC PRODUCERS

·-~------~~----1~--~~~--

5.0
2.5

GULF OPEC PRODUCERS

..---..................,____ _, ,.. ......

o~~--------~--------t--

-2.5
-5.0

---

NON·GULF OPEC PRODUCERS

-7.5
-10.0 I

1981

1982

1981

SOURCE: 011 and Gas Journal.

SOURCES: Hughes Tool Company.
Federal Reserve Bank of Dallas.

Chart 3
REFINERY CAPACITY UTILIZATION

Chart 4
REFINERY PRODUCTION

90 PERCENT - - - - - - - - - - - - - - -

110 (JUNE 1976=100) - - - - - - - - - - 105

100
95

,..,,......
60

. .,

~---·\ \

,.. ____ _

. ..__,

,...
·'

....... .., _

_,,~,\

TEXAS

\ TEXAS

\ r- ...... ,-'
\'

1981

1982

1981

1982

SOURCES: Board of Governors. Federal Reserve System.
Federal Reserve Bank of Dallas.

SOURCES: U.S. Department of Energy.
Federal Reserve Bank of Dallas.

FOOTAGE DRILLED

ROTARY DRILLING RIGS RUNNING
5THOUSANDRIGS --------------~

(Excluding service wells, stratigraphic and core tests)
50 MILLION FEET

,''

, .. ._,

,,.,,.---.....
' "'
,..,,..,,,,,,.'*"

,,..,,..,,.., ELEVENTH
'
2
DISTRICT STATES' ' - .... - -

-------- ...
TEXAS

l\~

,_,,,

......

._, "'"' ........

______.

0 r
1 ---------.-------...-------~
1981

1982

1. Louisiana , New Mexico, Oklahoma, and Texas.
SOURCE: Hughes Tool Company.

~A,

1983

''"""''"

......

ti'- ,,A ELEVENTH DISTRICT STATES'

I":' \ii .... -

\\ f " , >

-~ ~

r,------.,....---------.-------.
1981
1982
1983

1. Louisiana, New Mexico, Oklahoma, and Texas.
SOURCE: American Petroleum Institute.

ENERGY BRIEFS
• Weakness in the U.S. economy and the decline
in world oil prices have continued to hold
natural gas extraction below last year's production.
• U.S. oil production again posted slight gains
from four quarters earlier, although production
has declined in Texas and the four Eleventh
District states.
• In the three months ending December 17, U.S.
refinery operations fell 10.4 percent. This contrasts with a 3.8-percent increase in product ion
over the same period in 1981. In Texas, refinery
operations dropped 15.7 percent in the three
months ending December 17. Over the same
period in 1981 , a gain of 9.7 percent was
achieved.
• In Texas, manufacturers of oil field durable
goods still have large inventories of unsold
goods and are continuing to lay off workers and
cut production schedules. Although Texas

CRUDE OIL PRODUCTION
AND NATURAL GAS EXTRACTION

SEISMIC CREW COUNT
Daily

1982:03

four quarters earlier

011

Texas ... ... .......
District states' . . . . .
United States . . . . . .

-3.5
-2.4
.4

-3.6
-2.1
.8

1982
02
-6.1
-3.0
1.2

600

Thou sands
of
barrels

-6.5
-2.5
1.5

2,403
4,286
8,694

400

Millions
of
cubic
feet

200

Gas

Texas ........ . ... .
District states' .... .
United States ..... .

-4.4
-3.7
-2.5

-6.3
-5.6
-5.7

-1 .8
-2.4
-1 .9

-11 .01

17,049'

N.A.

-11.5'

48,550'

SOURCE: U.S. Bureau of Labor Statistics.
Federal Reserve Bank of Dallas.

1983

Eleventh Federal Reserve District
400(1979=100) - - - - - - - - - - - - - - - -

- .7
.0
-4.8

270.0
42.1
49.7

MINING'

,.....,,...

300

Number of employees
November 1982
Percent
Percent change from
change
preceding month
Thousands
from
1982
of
Nov.
Sept.
Oct.
Nov.
1981
persons

-2.0
-1.2
-8.9

·------------·---------1981
1982
ENERGY LOANS OUTSTANDING 1

TEXAS ENERGY INDUSTRY EMPLOYMENT

Oil and gas extraction . . . . . . -2.1
Petroleum refining . . . . . . . . . 9.0
Oil field machinery. ...... . . -7.7

MARINE

SOURCE: Society of Exploration Geophysicists.

1. Louisiana, New Mexico, Oklahoma, and Texas.
2. Preliminary figures.
SOURCES: American Petroleum Institute.
Texas Railroad Commission.
U.S. Department of Energy.
Federal Reserve Bank of Dallas.

Industry

800 CREWS - - - - - - - - - - - - - - - - - -

average

Percent change from

1981

employment in the manufacture of fabricated
metal products (which includes oil storage
tanks and drill pipe) and oil field machinery fell
for most of 1982, the rate of decline slowed
toward year-end.
• Total footage drilled in oil and gas wells completed since July has remained below the high
levels reported between March and June. This
reflects both a lagged response to the decline
in drilling activity as evidenced by the rig count ,
and a move to shallower wells.
• The U.S. seismic crew count, which is considered a leading indicator of drilling activity,
has fallen in all but one month since reaching its peak of 744 in September 1981. In November of 1982, the number of active crews fell
to 502, 2.7 percent below its October value,
and 31 .5 percent below its value in November 1981 . Nearly all of the decline has been in
land crews.

-8.1
-3.2
-42.2

200

,,,,.........,
,,
,

,,-... ---.,,,,,,,,,

PETROLEUM REFINING

100

01r-------,.-------.....--------.
1981

1982

1. Based on survey of largest banks in the District.
2. Includes crude petroleum and natural gas.

SOURCE: Federal Reserve Bank of Dallas.

1983

Energy (cont.)
over the last two years, the burden of
the reduction has not been evenly
distributed. Oil production by the Persian Gulf countries, non-Gulf OPEC
countries , and producers outside
OPEC are shown in Chart 2. Non-OPEC
countries have been increasing production, cutting into OPEC's share.
Within OPEC, the bulk of the most recent reductions has been at the expense of Saudi Arabia and the other
Gulf states.
The willingness of the Gulf producers to absorb additional production
cuts to defend the $341barrel benchmark price determines whether any further downward revisions in price expectations will occur over the next six
months. Saudi Arabia's resolve to
maintain the current price structure is
likely to be severely tested . An expected world-wide seasonal decrease
in demand during the Spring will force
additional supply curtailments by
OPEC. Many of the non-Gulf OPEC
members have announced intentions

to increase production next year to
meet balance of payments commitments. Realization of these plans
will force Saudi Arabia to further
reduce its production and draw down
its foreign exchange reserves. Should
the Gulf countries be unwilling to absorb these reductions in production,
world oi I prices wi 11 be forced
downward.
A reduction in the benchmark price

would further depress domestic oil and
gas industry earnings and investment
plans. The threat of an oil price reduction already has been cited as a cause
of the recent relatively poor performance of oil-related equities. Further
downward revisions in price expectations will make it even more difficult to
justify new investment in drilling and
exploration.
-Ronald H. Schmidt

Refining: Production Index Or Capacity Utilization?
Capacity utilization, which measures the percentage of operating
capacity in use, is widely reported and
easily understood conceptually. But
the recent wave of shutdowns has left
it lacking as an indicator of the state of
the refining industry.
Closing facilities can increase
capacity utilization even though actual
production may be stagnant or declining. This is evident upon inspection of
refinery capacity utilization in Chart 3.
Reductions in capacity occurring in

1982 between March and June cause
capacity utilization to give the impression that the industry is healthier than
is actually the case.
A different gauge of the state of the
refinery industry is a production index
(Chart 4), which measures actual industry activity. Because the production
index is not artificially increased by
reductions in available capacity, it provides a more accurate picture of recent
trends in the industry.
-Gary M. Ziegler

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Full text of Energy Highlights : January 1983

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