November 2007 Letter from the Editor

November is a time for reflection. As we head toward the holidays, we can be thankful for another year of strong revenues
and demand. Yet each boom seems to carry with it the seeds of the next bust.My thoughts are partly spurred by an interesting survey question, which asked where energy prices would be in 20 years: up, down or flat. I applaud the forward-looking approach, but just had to laugh. I don’t think there has ever been a 20-year period in which prices generally
trended just one direction. A more appropriate question might be, “How many market correctionswill we experience in the next 20 years?”
Of course, you can substitute your own euphemism for “corrections.”This and other items in the news got me to thinking about U.S. energy policy. Energy “policy” as practiced here seems to bump and lurch along from one crisis to the next. The current
high costs of energy have led to the predictable calls for taxing the “excess” profits, eliminating tax breaks or punishing the “price gougers.”What is poorly understood is that, while we are talking about huge amounts of money, when measured against financial standards like return on capital employed, the oil and gas industry is a bit of a laggard compared with many sectors of the economy. The truth is that a healthy energy sector needs to continue attracting capital for its exploration and development work. Punitive measures do more harm to the overall economy than to the oil and gas companies, but somehow folks just feel better.
A sound energy policy should do two rather simple things in my view: first, it should improve economic efficiency; second, it
should encourage a steady supply of energy and petrochemical feedstock here in the U.S. Of course, simple principles do not
necessarily mean that the steps to carry these goals out will be easy or simple. Efficiency can be found in many places. Conservation is one obvious example. Enhanced recovery projects that capture more A sound energy should do simple things…improve efficiency encourage supply of the oil or gas in place are another. Lower pollution and greenhouse
gas emissions will also improve the overall U.S. economy in the long run. What is perhaps a bit less intuitive is the damage
done by the incessant boom and bust cycles. Some rather specialized skill sets are employed in the oil and gas industry; however, when we allow the work force to be demolished in a downturn, then the ability to ramp up again is severely compromised.
We use lots of expensive equipment, but it requires properly trained and experienced people. The number of well-paid energy jobs lost in the mid-80s was an order of magnitude more than in other industries, so why was government falling all over itself trying to mitigate the pain in other sectors while turning a blind eye to us? These cycles are not only inefficient, they also work against a goal of steady supply. Some economists have argued that less expensive foreign resources are more efficient and
this is certainly true in the short term. However, over the long haul, one needs to factor in the costs of reliance on foreign sources of oil. Those costs may include increased military expenditures and costs of a deteriorating global security situation. It seems to me that a steady supply here is still a worthwhile goal. Again, the economic cycles work against this. The energy business is all about risk, but the successful companies are the ones who best mitigate those risks. We understand exploration risk, but financial risk can be even bigger. Whatever you might think about the futures market, its purpose is an attempt to mitigate against unfavorable price swings; the money made and lost there is substantial. Financial risk can be affected by government policies, so again, a good energy policy is one that helps the industry manage those risks while letting us differentiate ourselves in areas such as exploration where we have the expertise. Both politicians and industry pay plenty of lip service to serving long-term goals, but more often than not, annual and quarterly targets drive most decisions. energy policy
two rather things…it should economic efficiency (and) encourage a steady of energy.
The same is true for government programs, which simply must show a return every two years (on the election cycle). Yet longterm issues are the real drivers to a sound energy policy. I wish I had a comprehensive policy to offer, but it is all I can do
to explore for and develop the oil and gas that we so desperately need. Perhaps you have some good ideas about what should be in a good energy policy? If you would like to share them with us, please write.My e-mail address is hgs_editor@earthlink.net.