Minami Levonowich
KU Statehouse Wire Service
Oil prices may continue to drop in the near future, further hurting small businesses that influence the Kansas oil and natural gas industry. However, experts hope prices will rise by the end of the year.
Kansas’s oil production fell by 5.5 percent in 2015, and Edward Cross, president of the Kansas Independent Oil and Gas Association (KIOGA), fears that a much larger decline can be expected in 2016 if oil prices stay low.
Small independent producers in the state account for 92 percent of the oil and 63 percent of the natural gas produced, Cross said in an interview, adding that many people are affected by the low crude oil price environment. Already, companies have laid off about 50 percent of their workforce and some producers laid off as much as 25 percent. Across Kansas, family income has dropped by about $341 million.
“As a result of low oil prices, tax collections to the State of Kansas and Kansas counties have also declined dramatically,” Cross said. “Oil and gas severance tax collections by the State of Kansas declined by 58 percent in 2015, and property tax collections by counties declined by 43 percent.”
Reports show that in 2015, the United States experienced a giant drop in oil prices – more than 50 percent – and prices fell even lower in the first quarter of 2016. This severe drop has resulted in the country’s oil industry slashing at least 240,000 jobs and resulting in the further loss of more than 1 million jobs in related industries nationwide. It’s a level that hasn’t been seen since the Great Recession in 2009, and experts say that even though prices are expected to increase later this year, the state and global economy will continue to slow for the next couple of months.
The biggest factor contributing to the drop in prices, according to Cross, is the Organization of the Petroleum Exporting Countries’ (OPEC) actions to regain market share at any cost. The 13 major oil producing countries that represent OPEC, including Saudi Arabia—one of the largest oil producers in the world—announced in 2014, that they would no longer manage oil prices by cutting production. OPEC said it would no longer cut oil production to eliminate oversupply of oil. Instead, OPEC decided to dump its lower production cost oil into the global markets in order to lower the price of oil and force U.S. producers to cut their production.
On April 17, OPEC met again to try and establish a global oil supply agreement. The plan was to freeze oil output by OPEC and some non-OPEC producers at January 2016 levels so the world would know that the oil market would soon become balanced and prices would stabilize. However, the agreement fell apart when Saudi Arabia demanded Iran also take part in the freeze (Iran was the only major OPEC producer to refuse to participate in cutting oil production), Cross said. There has been talk of a potential emergency meeting in May, but the next official OPEC meeting is set for June 2.
Kansas’s oil and gas producers, as well as oil and gas producers nationwide, are competitors in the global oil market, which is influenced by OPEC’s actions, Cross said. This means that the state is not able to set its own prices but become a ‘price taker’ and receives a price based on market prices, adjusted for location.
“Kansas oil and gas producers have no control of crude oil prices, but can only manage their internal costs,” Cross said. “For Kansas oil and gas producers, optimizing internal operating efficiencies is paramount in order to hedge against volatile crude oil price swings.”
Cross is confident that oil prices will recover in the future since the current low price level is below production cost and, hence, not sustainable.
Ken Sit, oil trader at the international company, Eni Trading & Shipping, Inc., agrees that an equilibrium will be reached by the end of the year, which will cause “more positive sentiment for the markets to push prices higher.” After the recent OPEC meeting, he said that prices are trading much higher, which shows that the markets are slowly getting closer to being balanced. According to Sit, the strength of the U.S. dollar is also a determining factor to the price of oil.
“Look at gasoline margins and the U.S. dollar. If refinery margins are still strong, and the U.S. dollar is not too strong, oil prices should get stronger,” Sit said in an interview. “Almost all oil deals are done in U.S. dollars, so when it’s weaker, the price will be higher typically.”
Though oil prices will likely continue to be under pressure for the near future, there are signs that the second-half of 2016 should begin to see improvements to the oil markets and the oil industry. This will be welcome relief to the Kansas and U.S. economies, experts said.
Edited by Maddy Mikinski