Oil Firms' Retreat into America Not Necessarily a Good Thing
Samuelson, Robert J., American Banker
Just when you thought that oil was becoming dull, Texaco offers a cool $10 billion to buy Getty Oil. We are told that Texaco is finding oil cheaper on the stock market than it could by exploring. Maybe this is true, and maybe it isn't.
Most likely, the Texaco-Getty merger is part of a bigger story: the retreat of U.S. oil firms back into Fortress America. This may be good for the oil companies, but it is not necessarily good for America. Only ample supplies can keep oil markets stable, and unfortunately, the best prospects for new oil discoveries aren't here.
The tranquility of oil prices after World War II stemmed heavily from oil companies' globe-trotting. For 25 years, U.S. firms roamed the world as if they owned it. Their development programs expanded oil reserves by a factor of 10, and this cheap energy helped propel the postwar economic boom.
All this ended in the early 1970s. Oil consumption was on a rampage, jumping 20% between 1969 and 1973. This frenzied demand, combined with the 1973 Arab-Israeli war, raised prices. Although OPEC formally set prices, it could not -- and did not -- control the underlying forces that were decisive. These remain supply and demand and basic political conditions. The Decline of Private Firms
The upshot was to alter the politics and economics of world oil. No longer did private companies dominate. As late as 1970, 93% of the non-Communist world's oil reserves were owned by private firms. By 1979, the proportion was only 45%. Because oil prices had risen dramatically (but production costs had not), countries either expropriated the oil or imposed heavy taxes. If companies found oil, there was no assurance that they could market it profitably.
Even with oil and natural gas price controls -- and the subsequent imposition of the "windfall profits" tax in 1980 when oil controls were lifted -- the United States was a much friendlier place than most to operate. So exploration activity shifted here. From 1970 to 1980, the geophysical exploration performed in the United States rose from about one-third to one-half the world total.
The frustration, though, is that finding oil in America (especially in the lower 48 states) is tough. No area has been so thoroughly explored or developed. Of the 702,002 producing oil wells in the non-Communist world in 1982, 609,000 were in the United States. Despite increased activity, proved U.S. oil reserves fell from 39 billion barrels in 1971 to roughly 28 billion in early 1983. Less Expensive than Finding New Oil
Texaco, among others, had experienced a sharp drop in U.S. reserves. With the Getty purchase, it could more than double its U.S. reserves -- from 1.05 billion barrels to 2.3 billion. Although $10 billion is a lot of money, investment analysts figure Texaco is buying Getty's oil at between $4 and $5 a barrel.
This is probably less expensive than finding new oil, but just how much less is anyone's guess. Bernard J. Picchi of Salomon Brothers has estimated the aftertax cost of developing new oil at about $7 a barrel. But estimates are inexact, and recent declines in drilling costs could mean that the figure is lower.
What perhaps explains the gap between stock market oil and discovered oil is a difference in outlook. …