Industry cautious but optimistic as oil prices spike
| Wednesday, Jun 03 2009 06:57 PM
Last Updated Wednesday, Jun 03 2009 07:00 PM
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Two oil pumping units are seen in the distance off Comanche Drive as the sun comes up over the eastern mountains of Kern County in this photo from 2007.
Spiking oil prices have put local oil producers back in the position of playing economist -- and betting big money on their predictions.
Some feel confident last month's 29 percent jump in the price of heavy Kern crude (it sold Wednesday for $58.90 a barrel) is supported by growing demand for oil, and so they're preparing to invest in new drilling and well maintenance. Others prefer to wait and see if the prices hold up over a longer period.
Which way the industry goes could have big implications for local employment, since Kern's oil fields employ thousands of workers when prices are high and oil producers are willing to pay for new drilling or well maintenance work.
So far, the response from California's oil industry has been cautious. Between May 1 and May 29, the number of land-based drilling rigs in the state increased by about a fifth to 19, according to Baker Hughes Inc.
Some say this hesitance has less to do with the economy than with a general industry anxiety left over from last year's steep run-up -- and then sharp drop -- in oil prices. Many producers invested heavily in their operations last summer, only to see profits plummet.
Local oil service companies, meanwhile, went from competing to attract experienced workers to laying them off by the hundreds.
Now Kern producers are at odds over whether recent high prices result from pure market speculation that the economy is on the mend, or whether there are real signs that demand for oil is up.
Taft oilman Fred Holmes hears both sides, and although he wants to wait before making a decision, he's leaning toward optimism.
"We're getting teed up," he said, using a golf metaphor, "and I guess we'll get teed off if the price is right."
But Mike Kranyak, part-owner of Bakersfield oil production company San Joaquin Facilities Management, said he and others in town are content to keep "cooling their heels right now to see where it shakes out."
"I don't believe that (high prices are) necessarily a long-term deal," he said. "I think prices could go back down again."
Bakersfield oil producer Chad Hathaway agreed, saying he sees signs of surplus oil inventory, and that prices look "a little overinflated."
While there is room for disagreement, experts point to indications that demand is rising globally. The question is whether it's enough to merit new investment.
"It doesn't appear yet that there is evidence of a strong increase in the demand for oil," said Joe Sparano, president of the Western States Petroleum Association trade group.
The industry hopes to get a clearer picture over the next few days at the annual meeting of the California Independent Petroleum Association in Carlsbad. President Rock Zierman said attendees will hear presentations about trends in global energy demand, geopolitical conflicts and other factors affecting the oil outlook.
Perhaps ironically, problems in the wider economy mean that even oil producers who think oil prices will stay high are largely unable to take appropriate action.
Oil producers tend to rely on borrowing to finance new drilling. Because credit markets remain tight, borrowing is harder and more expensive to do.
One company currently constrained by the credit shortage is Bakersfield's Bonanza Creek Energy Co. President and CEO Mike Starzer said the company had planned to spend $48 million on drilling this year. But that budget was cut sharply because of difficulty getting loans.
"It makes sense to start drilling right now," Starzer said. "It's just that we don't have the credit resources."
