Well, at the end of June, nearing $40/bbl for the price of oil sure feels better than nearing $10/bbl. While it’s not the $55/bbl that we enjoyed pre-“Double Whammy,” (Covid-19 and Price War) it is much better than we experienced in the month of May, when realized prices for many were in the $17/bbl range and negative oil prices were seen for one day.
How did we do it? What caused prices to recover? It was a combination of things. First, on the “supply side” world, oil producers began making drastic cuts, OPEC+ made record cuts of nearly 12 million bopd, and U.S. Producers began shutting in wells and slashing drilling budgets. U.S. producers have shut in an estimated 1.7 million bopd. The recent Federal Reserve report indicated that 82 percent of all respondents actually shut in some producing wells. The slashed drilling budgets have caused the U.S. rig count to fall to its lowest number ever recorded, from 762 rigs last year to only 265 rigs now, a 73 percent decrease.
On the “demand side,” state governors allowed many states to reopen after the Covid-19 shutdown. People began driving and gasoline consumption increased. It was reported that traffic levels in some of the major cities of the world returned to 2019 levels in early June. This may be influenced some by the fact that fewer people are willing to ride public transportation at this time. But with several trillion dollars of stimulus money helping stimulate the economy, the consumption of energy has increased. These factors, combined, helped lift oil back into the upper $30s. We now hold our breath as we watch a surge in the number of Covid cases, after the economy began to open back up. While the number one concern will always be health and safety, we hope that this surge in cases will not cause a significant drop in fuel consumption and thereby cause oil prices to fall.
All of us have been deeply affected by this downturn. Almost everyone knows someone who has lost their job, and the chances of being rehired will depend on much higher oil prices than we are currently seeing. One segment of our society that has already been heavily impacted, and could be even more so by another downturn in prices, is our state governments. Both Texas and New Mexico have benefitted greatly in recent years from this prolonged economic boom, with its continually growing tax revenues and royalties. The State of New Mexico, where more than 40 percent of state revenue comes from the oil and gas industry, passed their budget in February based on the assumption of oil prices at $50/bbl for 2020 and royalty volumes that will not materialize. They have now had to slash this budget and, through a Special Session at the end of June, the legislature submitted a greatly reduced budget to Governor Lujan Grisham. These cuts will affect all citizens of New Mexico whether they are employed in the oil and gas business or not. Texas will be faced with these same challenges as tax revenues will not compare to prior years.
The PBPA recently commissioned a detailed study of the economic impact that the Texas oil and gas industry, and specifically the Permian Basin, has on the tax revenues for the State of Texas. This study was prepared with data through the end of 2019 and could not anticipate the extreme collapse that occurred in March. But this study reminds us all of the significant benefit the oil and gas industry of the Permian Basin has for the state budget, and of what the concerns can be for the state when our industry experiences a big downturn.
Many are asking when recovery for the oil and gas industry will occur. The Federal Reserve study surveyed many industry executives who feel that it may be middle to late 2021 before we see prices recover to pre-Covid levels. Bloomberg predicts that it will be 2023 before the United States can reach the 13 million bopd production rate that was seen prior to this collapse. Certainly, no one knows for sure. And while we who have been in the oil and gas industry for numerous decades have experienced numerous boom and bust cycles, never has there been a year to match 2020, for the crazy emotional roller coaster, actually seeing negative trading prices, or the impact to the economies of the world.