November 5, 2009 – Swift Energy President Bruce Vincent, who is chairman of the Independent Petroleum Association of America (IPAA), takes questions on the U.S. oil and gas industry.

Q: Why did oil prices rise to all-time record highs in mid-2008?

A: The public sometimes has the misperception that big oil companies determine the price of oil, or that speculators are to blame for run-ups when they occur. The reality is that the price of a barrel of oil today is mainly set by supply and demand fundamentals and by the value of the dollar.

Prior to 2008, demand for oil had risen around the world for several years.  We got to the point where all countries were producing from their oil fields at full capacity except for one – Saudi Arabia.  And that excess production capacity in Saudi Arabia was minimal and was of a lower quality oil that is high in sulfur.  Oil that is high in sulfur requires more refining, and this was at a time when the world’s refineries were running near their maximum output.  

When supply begins to come in line with demand – for any commodity, not just oil – the price rises to what it costs to produce the next unit.  Commodities trade on that incremental unit of production.  In 2007-2008, the world’s demand for oil was catching up with world supply, causing prices to rise to what it cost to produce that next barrel of oil.  Producing that next barrel of oil was becoming more and more expensive.

Meanwhile, the value of the dollar was declining compared to other currencies, and oil has long been denominated in U.S. dollars.  This means that when the value of the dollar falls, the price of oil rises in the United States to compensate for the drop in the dollar. 

Speculators – who are, we must remember, simply financial investors – may have contributed some to the run-up in price of oil, but we have to remember that as investors they move capital into an asset class because of their assessment of the basic supply and demand fundamentals.  In the end, the basic cause of the run-up in oil prices in 2008 was supply and demand.  The value of the dollar did have an impact, and the movement of capital by speculators may have played somewhat of a role.  But the major cause of the all-time high oil prices we saw in 2008 stemmed from supply and demand fundamentals – the amount of oil the world was consuming was catching up close to the maximum the world could produce.  Now in 2009 we are in a situation where demand for oil has fallen, which caused prices to fall.  Demand fell in a reaction to both the high prices of 2008, because people and businesses cut back on energy use after prices rose to record highs, and the economic downturn, which lowered industrial demand for energy.

Q: With prices down considerably in 2009 from lofty heights of 2008, what is your outlook for oil prices looking forward?

A: There is little doubt in my mind that the price of oil will rise over time from where it is now.  Keep in mind that this is a cyclical business.  It always has been.  If you follow the oil and gas industry over several decades, you can see how it works.  When prices fall, as they have in 2009, returns are lower for oil and gas companies. This forces oil and gas companies to cut back.  They drill fewer wells.  Meanwhile, demand begins building again because energy is less expensive.  As demand builds, and excess capacity of supply tightens, all of a sudden we’re back into a rising price cycle again.

Currently, oil prices will likely stay in the range of $65 to $75 a barrel for the short run. The world now has excess production capacity in several countries in addition to Saudi Arabia.  When demand rises back up to where the world begins to run low on excess production capacity for oil, prices will rise.  When that happens, we likely will have a significant upward move again.

Q: With the emphasis these days among Washington policy makers on clean energy, climate change, and other environmental issues, is there still a role for oil and natural gas in the nation’s energy policy?

A: Right now almost all -- 94% -- of our country’s transportation system runs on oil.  When you consider the United States’ total energy needs for everything from running industries to heating our homes to generating electricity, well over half -- about 61% -- is supplied by oil and natural gas together.  Even the government’s own forecasts under the current administration don’t show this declining too much over the next twenty years.

In the case of oil, think of how many cars, trucks, buses, airplanes, ships, and trains we have in our nation – and consider that only 6% of them run on alternative fuels, including natural gas, another fossil fuel, and electricity generated from fossil fuels.  The U.S. Department of Transportation estimates that we have almost 250 million cars and trucks on our streets, many of which end up staying on the road for over a decade.  To switch our entire transportation system away from petroleum to another source would take considerable time, and expense.

As for natural gas, I’ve spent a lot of time this past year on Capitol Hill educating our country’s lawmakers on behalf of IPAA about the advantages natural gas has over other fossil fuels.  One of our goals is to encourage Congress to keep natural gas as an integral part of our country’s clean-energy agenda. Of the three fossil fuels, natural gas is by far the most environmentally friendly.  During combustion it releases only a fraction of the particulates and sulfur dioxide that coal and oil release, and it emits far less carbon dioxide, the major greenhouse gas, than coal and roughly a third less than oil.  The other thing to consider is that natural gas is also the best bet for supplementing green energy sources.  When the sun isn’t shining and the wind isn’t blowing, natural gas power plants can come online quickly and go offline when the green energy source is back up and running.  In comparison, nuclear and coal-fired power plants, which tend to be larger and more capital intensive, have to be kept running virtually around the clock. 

Based on the feedback we’ve received, I think that the IPAA’s many visits to Capitol Hill this year have gotten across our message for now.  Policy makers seem to have a better understanding of domestic oil and natural gas in the nation’s energy mix.

Q: What about the proposed tax changes for the domestic oil and gas industry as outlined in the White House administration’s budget for the U.S. government?

A: That was another issue that IPAA addressed to our country’s political leaders this year.  The administration’s budget initially sought to eliminate virtually every tax incentive that exists for the oil and gas industry – including parts of the tax code that have been in effect since 1913, which means they are built into the fabric of the industry.

The unintended effect would be to curtail oil and gas development and exploration, since companies typically use cash flow for drilling.  And wells with marginal production would likely be shut-in, in some cases permanently.  The end result would be a decline in domestic production, which would be replaced by production from overseas to meet demand here in the United States.  Our government would lose revenue from the royalties and taxes it earns from domestic oil and gas production, and the 33 states that have an oil and gas industry would see jobs lost.

The good news is that these proposed tax changes for the industry are now off the table for 2009, and people in Washington are beginning to see the ramifications of curtailing domestic production and how that affects our nation’s energy security.   Any tax changes that restrict domestic production of oil would only increase our reliance on foreign oil.

Q: What other policy changes pose the biggest threat to the oil and gas industry if enacted?

A: The biggest issue that the IPAA is addressing right now is a proposed change to the Safe Drinking Water Act that would end the exemption for hydraulic fracturing, which is a technology used to produce from tight sand formations and natural-gas shales.  Hydraulic fracturing has been regulated by the states for decades, and these proposed changes are part of an effort to put it under federal oversight.  The end result would be time delays and added expense for drilling wells that are hydraulically fractured, and we at IPAA think it would be an unnecessary burden on the industry.  The industry has been hydraulically fracturing wells for many years under state regulations, and its environmental record is pristine.

Hydraulic fracturing is a critical issue because it is a technology that is letting the industry unlock oil and natural gas production from formations once thought to be uneconomical for production. Without hydraulic fracturing, we could not produce from those reservoirs.

Q: How important is technology overall to the oil and gas industry?

A: Advances in technology make all the difference for our industry.  In the past few years, advances in geoscience and completion technologies have allowed us to unlock oil and gas reserves that before were uneconomical or too difficult to produce.  We are also seeing technologies combined in new ways to access reserves – horizontal drilling combined with multiple-stage fracturing is one example.  Technology is letting us drill to deeper horizons, it’s letting us produce reserves from difficult resources like shale, and it helps us keep costs down.  The bottom line is that technological advancements lower the price of oil and boost production higher.

Q: Any final points you’d like to make?

A: This year the U.S. oil and gas industry celebrates its 150th anniversary -- our nation drilled its first oil well in 1859, up in Pennsylvania.  Our nation’s economy has risen in lock-step through these past 150 years with our rising energy consumption.  The two are tightly linked.  Without plenty of affordable energy, our economy can’t grow as fast.  Any policies made by our nation’s leaders need to take this into account.  It is true that the United States consumes about 21 percent of the world’s energy – at the same time we need to keep in mind that America also produces about 23 percent of the world’s gross domestic product. The reality that this link exists must be reflected in any policy actions. 

Swift President Bruce Vincent: Interviews and Statements

"Executive Q&A: Independent Spokesman,” Oil and Gas Investor, November 2009

"Statement of Bruce Vincent on Behalf of the IPAA to the Congressional Natural Gas Caucus," Washington, D.C., Oct. 21, 2009.

An Interview with Terry Swift and Bruce Vincent of Swift Energy, Oil & Gas Financial Journal, Oct. 1, 2009.

"Special Focus on Oil & Gas: Offshore Opens Up," Power & Energy magazine, Issue 6, February 2009.