Sunday, June 28, 1998

Oil producers call for government intervention could be risky

By Scott Scholten / Abilene Reporter-News

Inviting the government into business affairs is always a tricky business. Often, it's hard to get it to leave.

So it's odd to see some oil quarters entertaining a call for government intervention when oil prices scraped 12-year lows two weeks ago and have since only hobbled along upward.

Urgency for some type of regulatory reform is apparent since drilling a well is something akin to lighting a fuse. Once it's started, it cannot be stopped.

Plugging or pumping are the only options: idle, open bores risk damage to oil-oozing formations. Economically, unplugging such wells would require $50 per barrel posted oil prices.

Quite naturally, producers and royalties holders are concerned marginally producing wells, producers' bread and butter, will have to be plugged since oil prices barely cover a well's operating costs.

So simply turning a well off to ride out low prices, stopping the meter on a producer's variable costs, is business suicide.

Producers expended a lot of energy in the late 70s to stop government meddling in the petroleum sector.

That was no small effort. Yet producers had to wait for the likes of Ronald Reagan, who had a government-reducing zeal that doesn't often occupy the Oval Office, to get rid of the price controls.

Free market fans were, doubtless, elated once government's heavy hand was lifted and producers were free to respond to market forces.

Heady oil prices in the early 80s were the toast of Abilene and much thanks goes to free markets.

Sort of.

Regulated prices kept oil production at something less than global demand. Once President Reagan did away with the confusing, multi-category price controls, producers were selling oil at prices accurately reflecting the planet's thirst for oil.

But it was the preceding price controls that warped the market, causing short supplies and the oil price bubble of the early 80s. That sinister effect of regulation should be kept in the fore.

Except for a couple moments of weakness, the petroleum industry has kept itself in check rather nicely against the temptation for a government rescue from devastatingly inadequate oil prices. Price supports and import fees, producers largely recognize, are more trouble than they're worth.

Instead, it's the little things that count.

Taxes and regulations on marginally producing wells raise the real costs of operating such wells beyond the price a barrel fetches.

Mounting efforts to ease such burdens are steps in the right direction. They are steps toward less government intervention, not more, and ought to be the first line of defense.

(Scott Scholten may be contacted at (915) 676-6737, or scholtens@abinews.com.)