When the price of oil plummeted in the 1980s, Louisiana lost approximately 146,000 jobs — 9 percent of its total workforce — in a four-year time period. Although low oil prices aren’t good for the state’s budget, economist Dr. Loren Scott explained they’re not as bad for the Louisiana economy as they were approximately 30 years ago.
Scott, an emeritus professor at LSU, told the ABC Pelican Chapter in Baton Rouge, Louisiana, the price of oil didn’t drop quickly because of rising U.S. production.
“Anytime the price of oil falls quickly, I look to Saudi Arabia,” Scott said. “The question becomes are the Saudis trying to do the same thing that happened in the 1980s?”
Scott has been following the oil and gas industry closely for more than four decades. He thinks Saudi Arabia feels threatened by the U.S. simultaneously gaining market share domestically and internationally. Scott hypothesized Saudi Arabia could be lowering oil prices to wind down the U.S. shale boom, and as a result of the Department of Commerce’s ruling that removing volatile gases from oil made it a petroleum product — not petroleum.
In 2008, there were five states in the U.S. producing meaningful amounts of oil and gas, compared to approximately 20 today. Also, since 2008, U.S. oil production has increased approximately 70 percent, which is the highest growth of any country in the world over that time period. The U.S. went from importing 66 percent of its oil in 2008 to importing less than 44 percent in 2014.
According to Scott, every shale play is different and the technology is not easily transferrable.
“When you drill in the Gulf of Mexico with a new technology, you can easily transfer this technology to other parts of the world,” Scott said. “This is not the case with shale plays.”
North Dakota’s Bakken formation has hard rock shale, which helped the state go from producing 10,000 bpd in 2003 to 1.1 million bpd in 2014. But the Tuscaloosa Marine Shale, located in Louisiana and Mississippi, has a claylike consistency, which makes it more expensive to extract the oil and creates a higher “breakeven” oil price.
“The breakeven prices of the shale plays are coming down because companies are figuring out how to drill more efficiently,” Scott said. “There are edges associated with each one of these shale plays where it’s harder to drill.”
According to Scott, when the price of oil fell, many companies moved out of the edges of the shale plays. He explained Saudi Arabia is capable of countering an increase in U.S. production with its own production.
“Saudi Arabia can go as low as $58 per barrel without impacting its revenue from oil sales,” he said. “Saudi Arabia is going after the edges of the shale plays. If oil companies move back into the edges, I believe the Saudis will lower the price again. Saudi Arabia wants to cover and keep its international market share.”
According to Scott, Louisiana’s economy is better at enduring a decline with the price of oil because of drilling in the Gulf of Mexico.
“The Gulf of Mexico is very different than the shale plays,” Scott said. “Oil producers in the Gulf of Mexico plan long term, allowing them to withstand fluctuations. Also, the breakeven point for the Gulf of Mexico is much lower than any shale play.”
Scott said he believes oil prices will increase above $70 per barrel before the end of the year.
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