Energy Producers In The 1980's: A New Environment, New Goals

Abstract A New Environment Energy, especially natural gas, historically was a low priced economic input. Twice during the 1970's, political-economic events led to major oil price increases. During the mid-70's, Canada and the United States linked natural gas to crude oil prices. Gas prices exceed market clearing prices - gas is now an expensive economic input, causing the magnitude and profile of demand to change (with a 3–5 year lag). New Goals Major changes for producers strategy in the 1980's:national energy policy - industry associations are now making themselves heard in energy policy making for the rest of the decade.markets - are a function of price. Producers must price to hold/win market share; and must market aggressively, in both domestic and export markets.efficiency - wellhead prices will be netted back from consumer prices. Low cost, efficient producers will make the highest profit.fiscal burden - the industry must retain a share of total revenue to yield appropriate return for risk. The main problem is revenue (v.s. income) levies - i.e. royalties and PGRT. The 1980's will be a decade of consolidation and gradual recovery. Producers, through their own action can adopt a successful strategy for the new environment. Introduction The purpose of this paper is to examine first, the changes that occurred to historical oil and gas pricing during the 1970's, which created a new energy environment; and second, implications of this new environment for Canadian oil and gas producers. The modern world as we know it, is the result of the two industrial revolutions. The first in the nineteenth century, resulted in the modern factory, and the extensive use of coal energy to power steam engines. The second industrial revolution, in the early 20th century, brought us the internal combustion engine, and a demand for petroleum. Petroleum became the necessary main spring for the industrialized world, mainly in the Northern hemisphere. The West's modern need for increasing amounts of oil, and its unequal distribution (several hundred million years ago), laid the groundwork for the Organization of Petroleum Exporting Countries (OPEC), founded in 1960, (to which the North American oil and gas industry owes it's almost overnight prosperity during the 1970's). PART I: OPEC SHOCKS OF THE 70's A REVOLUTION IN ENERGY PRICING International Crude Oil (U.S.) Worldwide, the price of oil was remarkably stable from the end of World War II to the early 1970's, ranging from $1.80 to $2.50 per barrel. In the 1970's however, two massive energy price shocks shook the world, affecting all industrialized countries and developing nations. During OPEC 1, from late 1973 to early 1974, political instability in the Middle East was seized upon by OPEC price hawks as the opportunity to quadruple the Saudi price, from $2.50/ba in 1972 to $11.60/ba by 1974. OPEC had come of age and the world economy was in a relapse during the mid - 1970's.