Economist predicts bright future for oil- and gas-producing region

CANTON, Ohio — Of the myriad market forces that have brought about the recent drop of crude oil prices worldwide, shale has had the most impact.

That’s the observation of American Petroleum Institute Chief Economist John Felmy, who spoke at a Stark County Oil and Gas Partnership forum May 13, held at the Pro Football Hall of Fame in Canton.

Felmy’s presentation gave a national perspective on the oil and natural gas industry, the impact of lower oil prices, and what these impacts mean to shale play across the country, including Ohio.

“The questions are, how did we get here, and what can happen?” Felmy said. “There have been a host of ups and downs, but what is different this time is that it’s a supply issue. You have to go back to the 1920s in Texas to find a time when supply impacted prices — and the U.S. was the only player then.”

Industry beginnings

Felmy, whose beginnings in the oil industry date back to the early 1970s when, he said, “we made every mistake after the (1973 OPEC) embargo,” leading to shortages at gas pumps across the nation.

“It wasn’t until the 1980s, when President Reagan decontrolled (the oil industry) that lines went away,” Felmy said.

In 1970, U.S. field production of crude oil peaked at 9,637 barrels per day, before dropping to a low of 5,350 barrels per day in 2009, according to the U.S. Energy Information Administration. By 2014, the U.S. was producing 8,663 barrels per day, the EIA reports.

In the past decade, Felmy said, there has been one primary supply driver in the petroleum industry: Shale.

“We have changed everything (with) Utica, Marcellus, and mixed oil,” Felmy said. “I would never have dreamed it would happen.”

Supply impact

Felmy explained the concept of elastic demand, wherein even a small change in oil supply can dramatically change the consumer price of oil products, primarily fuel. Every 1 percent change in supply can equal a 10 percent change in the price, Felmy said.

Through the end of 2014, increases in U.S. crude oil and natural gas production served only to offset losses in South Sudan, Libya and parts of Iraq, Felmy said. Now that surpluses from OPEC nations are back online, he added, there would be a 4-5 percent increase in production worldwide.

There is, of course, the demand side of the equation to consider, which, Felmy said, has been misrepresented in the media.

“What a lot of the media has said, and hasn’t gotten right, is that demand is slowing. No, the growth of demand is slowing,” he said. “That is a big difference, especially in terms of gas and oil.”

Fluctuation in crude and natural gas prices, he said, is directly tied to price of gasoline.

“Basically, the gasoline price is about 80 percent the crude price, with the rest in taxes,” Felmy said. “So if you divide 80 percent of the crude price by 42 — the number of gallons in a barrel — you can pretty much figure out the gas price.”

And there is still much demand around the world, he added, for everything from heating and cooling to vehicle fuel.

“We are now the world’s biggest producer of natural gas and we are going to be biggest oil producer,” Felmy said. “But a lot of things can affect that — hurricanes, what will happen in Iran when sanctions are lifted, and anything can happen in the Middle East.”

Other costs

In addition to these market impacts, exchange rates, inventories and taxes play a part, he said.

“The three top things are taxes, access and regulation,” Felmy said.

In Ohio and surrounding states, production costs can also be considerable for drillers, he said, but can, in turn, benefit the drilling industry supply market. In terms of cost per pipeline foot, Pennsylvania ranks third in the nation at $537, West Virginia fourth at $518 and Ohio seventh at $454.

Bright future

Indicative of the impact the shale and natural gas industry has had on local economies overall, Pennsylvania native Felmy said he is seeing something in the Marcellus shale area he has never seen in his lifetime: “help wanted” signs. And he does not expect that to change anytime soon.

“Natural gas holds promise for fleets, buses, and trucks — and I support all types of energy — but it’s a huge infrastructure to change and it costs a lot.”