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How the Oil Boom has created wealth in the oilfield industry

Published 9/22/2012

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The Boom

Oil prices have fluctuated dramatically in recent years. In 2002, the price of crude oil hovered below $30 per barrel. By 2008, the price had risen to over $140 per barrel. This substantial increase had many causes.

The September 11, 2001 terrorist attacks on the United States caused demand for oil demand to plummet briefly. Soon afterward, a series of concurrent production cuts by OPEC followed by Venezuelan production cuts saw the tide beginning to turn. Demand for oil in developing third-world countries was increasing. The United States declared war on Afghanistan and soon afterwards, Iraq.

Oil prices would continue to rise for several years. The War On Terror had reduced Iraqi oil production, and the campaign itself required large quantities of oil. Consumption was on the rise in many locations. In 2005, Hurricane Katrina impacted the American South, reducing production capacity in refineries and drilling platforms in the Gulf of Mexico.

In 2008, the United States experienced substantial economic turmoil, and oil prices were at record highs. Oil prices subsequently crashed. However, oil has since been steadily regaining ground. The War in Iraq continued and consumption remained high, both domestically and abroad. Recent turmoil in the Middle East has kept oil prices at high levels.

Spreading The Wealth

Nearly every industry felt the effects of the oil boom in one way or another. As the value of oil increased, the industry found itself flush with fresh capital for investment or distribution to shareholders. Many companies reinvested the capital into new operations and territories, thus driving the growth of many supporting industries.

Benefits to Private Communities

The oil boom helped to fuel demand for new exploration and drilling equipment, ranging from trucks to massive drilling rigs and mud pumps. As oil prices skyrocketed, it became worthwhile for new and difficult territories to be explored and for previously capped oil wells to be reexamined for their economic value. Providing equipment to this new increase in oil exploration helped see many equipment manufacturers through the hard economic times.

Construction contractors have seen benefits for similar reasons. Constructing the machines and structures for oil drilling sites, grading the land for stable drilling platforms, and building pipelines in which to transport the oil are just a few of the necessary ways in which the oil boom has provided numerous jobs to local workers. Logistics providers and trucking companies saw benefits for similar reasons.

The oil boom has affected many other groups. As the industry grew, investment capital flowed towards transactional attorneys who drafted oil leases and provided legal counsel, financiers who were more willing to provide investment capital to individuals in this industry, consulting groups who helped make existing operations more efficient, land surveyors who help determine the appropriate drilling site boundaries, and property owners who provide the land in the first place. Countless retail locations, restaurants, and property owners benefitted from drilling sites in their neighborhoods.

Government Tax Benefits

Governments have also seen benefits from increases in oil production. In the United States, various federal, state, and local taxes on petroleum products have been used to fund government programs. In particular, governments have used tax revenue from Texas' expansive oil industry to fund highways, school districts, and other state programs. In 2011, ExxonMobil, ConocoPhillips, and Chevron alone paid $54,900,000,000 in taxes.

These benefits can also be seen outside the United States. State-owned oil companies control over 75 percent of the world's crude oil production, and the added revenue from the boom within the last decade has helped foreign governments conduct their own affairs and fund their own programs.

Cash Flow Shortages

The oil boom has been a victim of its own success. As the demand for new oil production increased over the last several years, many companies in the oil industry are experiencing cash flow issues.

Causes

Present cash flow issues among companies within the oil industry stem from multiple factors. Foremost among these problems is the excessive supply of oil. American oil inventories are high at present. This is a common problem; oil inventories rise and fall on a regular basis as production and demand fluctuate. However, with the Iraq War all but over and Iraqi oil production coming on line, there is both a reduced demand and an increased production of oil.

Recent years also saw increasing unrest in the Middle East that news reports occasionally called the "Arab Spring." Oil prices rose steadily as investors feared disrupted oil supplies. The unrest has simmered recently, quelling fears of disruptions in the oil supply coming from the Middle East. This caused oil prices to fall. The falling oil prices resulted in less money for producers, and hence, diminished cash flow.

In some areas, infrastructure is a also problem. Inadequate infrastructure such as pipelines to move the oil to refineries and railways cause production bottlenecks and limits output. Having a fine location and a series of profitable wells means little if the company cannot get workers in or the oil out.

Effects

Cash flow issues within the oil industry cause harm in several ways. First, reduced cash flows mean a decrease in infrastructure development. Property, plant, and equipment are expensive, and businesses cannot always float the cost of a new venture or obtain financing without having enough money. Even companies that are capable of making the investments sometimes elect to retain their earnings rather than make an investment if a series of new wells is in danger of becoming unprofitable if the price of oil drops any further or if a refinery will sit idle in a recession. This can cause problems when oil prices increase if additional refining capacity or oil supplies are urgently needed. More information on Oilfield Factoring and Financing Receivables for the Oilfiled Industry

Just as the oil boom discussed above presented numerous benefits to the community, reduced investments in property, plants, and equipment present a variety of negative externalities to oil service providers. Businesses relying upon company workers as patrons may experience reduced cash flows and find themselves being unable to remain solvent. Equipment manufacturers do not make sales, causing economic hardships for those companies and reduced investments in new technologies. Land surveyors find themselves out of work. Property owners sit on vacant land that is potentially rich in oil.

Cash flow problems also have a chilling effect on exploration. Exploring new territory is a multi-faceted process involving surveying, drilling, and obtaining leases. This all requires cash outlays on the part of the exploration company. The more difficult the area to access or drill, the more likely it is that exploration will not take place. Without new wells and pipelines, oil supplies remain lower, and the prices remain higher. More On Factoring Oil Companies

Top 10 Fastest-Growing USA-Based Oil-Related Industries
  • Pipelines
  • Engineering and Construction
  • Petroleum Refining
  • Mining and Crude Oil Production
  • Oil and Gas Equipment and Services
  • Energy
  • Construction and Farm Machinery
  • Metals
  • Industrial Machinery
  • Chemicals
Top 5 American Shales For Exploration

Oil shale formations in the Western United States tend to be more concentrated than Alaskan or Canadian oil shales. In fact, the U.S. is home to the largest shale oil deposit in the entire world. It is collectively known as the Green River Formation. Spanning 17,000 square miles and stretching under Utah, Colorado, and Wyoming, this deposit is estimated to hold between 1.5 and 1.8 trillion barrels worth of oil. Current estimates claim that roughly 1.1 trillion barrels worth of oil is recoverable from the deposit.

  • Piceance Basin: A 1,225 square mile region of Colorado holds over 80 percent of the Green River Formation's shale.
  • Uinta Basin: This basin in Utah has seen several estimates of its oil supply surface over the years. The oil is close to the surface.
  • Green River Basin: Located in Wyoming, the Green River Basin is home to 250 billion barrels worth of shale oil.
  • Washakie Basin: Also in Wyoming, this deposit houses roughly 50 billion barrels worth of shale oil.
  • Elko Formation: Roughly 200 million barrels of high-grade shale oil can be found in this Nevada formation.

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