We have witnessed a major drop in crude oil prices over the last month. In fact the drop has been even more dramatic over the last several months as we have watched prices drop by 25% since mid-summer. `For us, those living in North Louisiana, this is a double edged sword just as it is in many oil producing countries. For others in our country that are not located in an oil rich part of ournation the lower oil prices are a boom. For anyone looking at international developments, lower oil prices could lead to unforeseen negative issues.
North Louisiana has witnessed a renaissance in oil and gas prospecting that kindles memories of the onshore oil booms of the 1930s, 40s and 50s. The Haynesville Shale gas production in the western part of our state has fueled much of the countries industry and natural gas has witnessed a stabilized price for years. The Smackover Brown Dense is different. This is a new oil play and the northern part of Union Parish is the focus of this potential field. While we enjoy lower gasoline prices the oil companies are certainly looking at the effects of lower crude oil prices and their ability to explore for and produce oil in the Brown Dense.
When I was in Arabia we had a class on oil and gas facility investment. The one thing that really stuck with me was that when evaluating some negative impact on an investment the sunk cost, money that all ready been invested, was to considered spent and should not be considered in making a decision to move forward with a project. In other words, don’t throw new money into a project to try and get some return from the project just because a large amount of money has already been expended. Oil companies in Union Parish are probably now looking at the new price points of oil and evaluating what the impact is for moving forward with their drilling programs. The estimate of how long we have low oil prices will also effect decisions as to how soon the Brown Dense can expect a large drilling program. If a well that produces 500 barrels of oil a day gets clobbered with a $20.00 a barrel a day in oil price cuts, the oil company will probably see a reduction of $150,000 – $200,000 a month in revenue. This is sobering when evaluating a drilling program, even when all the land is leased and the company has deep pockets. It takes a large financial outlay to drill and then produce a single well. Multiply that by a hundred wells and the impact to the oil company is quite large.
Lower oil prices to the country as a whole should have a large positive impact to the businesses and the population. The travel industry should see the benefits of lower oil costs. Gas price declines encourages America to travel. Benefiting from the traveling America will be the restaurants, hotels, camp grounds, entertainment establishments and anyone that interfaces with the traveling public. It is said that every dollar spent in a community is circulated seven times so these is a trickle down effect to lower gas prices. Lower prices at the pump also means more money in the pockets of Americans. This extra money leads to more spending and this spending leads to more required production which leads to more jobs. Some of this money will find its way into savings accounts and while many say this does not lead to growth through spending it does help to grow our economy. Money placed into savings accounts or into the stock market provides funds for future investment in our country and thus constructions and capital projects provide jobs for our country. Oil prices are not the only catalyst for future American growth. Our economy is too complex for only one industry to drive the growth but it does have a major impact on the growth of a country that is addicted to low cost energy.
There is another side to this story though. While oil users will reap an initial benefit to this lower oil cost trend, countries that rely on oil for their revenue will not be so lucky. Moderate mid-east countries that support our country and the war on terrorism will have challenges. Low oil and gas prices will lead to lower job growth in these countries and thus unrest among the youth, the same youth that will join radical groups. Additionally the ability to fund anti-terrorist activities from moderate Arab countries will be impacted with lower oil revenues. Today we will reap the benefits of lower oil prices but we need to understand that there would be consequences in the future that we need to prepare and plan for.

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