Crude petroleum and natural gas - Industry Overview

US Industrial Outlook,  Annual, 1992  

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The crude petroleum and natural gas industry (SIC 1311) is made up of establishments engaged in operating oil and gas field properties. Such activities include exploration for crude petroleum and natural gas; drilling, completing, and equipping wells; operation of separators, emulsion breakers, and desilting equipment; and all other activities incident to making oil and gas marketable up to the point of shipment from the producing property. This industry also includes production of oil through the mining and extraction of oil from oil shale and oil sands, and the production of gas and hydrocarbon liquids through gasification, liquefaction, and pyrolysis of coal at the mine site. Coal mining and petroleum refining are covered separately in chapters 2 and 4, respectively. Factors to convert crude petroleum, refined petroleum products, natural gas, and coal from U.S. customary units to metric units are in Table 1.

Table 1: Average Energy Conversion Factors

                           U.S. Customary   Metric Unit
   Item                         Unit        Equivalent
Crude oil                   1 barrel       0.1364 metric tons
Coal                        1 short ton    0.9072 metric tons
Natural gas                 1 cubic foot   0.0283 metric tons
Natural gas plant liquids   1 barrel       0.0862 metric tons
Btu/joule                   1 Btu          1,055.1 joules
Petroleum products
 Motor gasoline             1 barrel       0.1172 metric tons
 Distillate fuel oil        1 barrel       0.1340 metric tons
 Residual fuel oil          1 barrel       0.1502 metric tons
 SOURCE: U.S. Department of Energy, Energy Information
Administration.

General Developments

Despite the recent massive destruction of crude oil producing and petroleum refining facilities in Kuwait and Iraq, the same fundamental factors that have affected the outlook for the U.S. crude petroleum and natural gas industry in recent years will continue to shape the industry to 1996 and beyond. These factors include: the price and availability of oil from the Middle East; the continued decline in production of crude oil in the United States and the Soviet Union; and changes in environmental policies. Likely results could include increased U.S. and world dependence on oil from members of the Organization of Petroleum Exporting Countries (OPEC), highly uncertain and potentially more volatile oil prices, and a higher growth rate for natural gas production in the United States and elsewhere than for other fuels.

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The existence of surplus crude oil production capacity and the willingness to adjust production levels are the two principal requirements for stable crude oil markets. Without excess capacity, supply disruptions in some countries cannot be compensated for by others. This was dramatically demonstrated during the Persian Gulf crisis. Surplus capacity in Saudi Arabia and a few other countries and the utilization of that capacity prevented, and continue to prevent, severe market disruption.

Although unused capacity contributed to market stability in 1990 and early 1991, it ordinarily creates pressure to overproduce and contributes to market uncertainty. The likely restoration of a large portion of Kuwait and Iraq's production and export capacity over the next few years could lead to such a development in the absence of substantial growth in world oil demand. Formerly, OPEC members attempted to exercise control over production levels in each country through a system of mandatory production quotas. Because of the crisis in the Middle East, the mandatory system has since been replaced with a voluntary system. Production under the new system has had to be curtailed on at least one occasion as a result of weak prices, even in the absence of supplies from Kuwait and Iraq. The pressure to deviate from mandatory quotas, if they are reimposed, is likely to be substantial and could lead to a weakening of prices.

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In the longer term, additional capacity and production will be required to accommodate the expected large increases in world oil demand and to compensate for expected sharp drops in U.S. crude oil production and exports from the Soviet Union. Only a few OPEC countries, particularly Saudi Arabia, have the petroleum reserves that will allow the required increase in production capacity to be attained. Given the large-scale financing that is required, the prospect that such expansion will occur soon enough to meet the increased demand is uncertain.

The relative shift in exploration and development expenditures for crude oil away from the United States to foreign non-OPEC areas, evident over the past several years, is expected to continue for the foreseeable future. A substantial part of the shift has been to Canada but, in future years, it could be to Latin America and the Pacific Basin. The shift results from several factors. One is the limits placed by state and Federal governments, for environmental reasons, on the search for oil and gas in those offshore areas that comprise some of the best U.S. prospects. Another is the greater prospect of locating large reserves abroad than domestically. A third factor is the lower operating costs associated with the production of large reserves concentrated in one place. The shift abroad could slow if recent Department of Interior proposals to increase leasing of federally controlled tracts on the U.S. Outer Continental Shelf become final and are adopted in 1992, and if related proposals contained in the Administration's National Energy Strategy are also adopted.