American Oil and Gas Reporter - June 2015 - 117

ConventionCoverage: Texas Alliance of Energy Producers

Price Recovery May Be Faster Than '86
WICHITA FALLS, TX.-Much about
the current oil price shock is similar to
the price collapse of 1986. But there are
some differences that make one market
analyst think the road to recovery may
be a little quicker this time.
Jeremy Friesen, executive director at
Morgan Stanley in New York, shared his
observations during a "surviving the
downturn" seminar at the Texas Alliance
of Energy Producers' annual convention,
April 21-22 at the Multipurpose Events
Center in Wichita Falls.
In two other presentations during that
session:
* Gary L. Stone, vice president of
engineering at Five States Energy Capital
in Dallas, provided an overview on mezzanine financing.
* Brian A. Miller, president of Miller
Consulting Inc. in Austin, Tx., and chairman of the Alliance's Railroad Commission Committee, discussed the information
operators could glean from the RRC's
website.
On a graph, Friesen pointed out, last
year's drop in oil prices mirrors closely

Although there are a number of similarities between the 1986 crude oil price
collapse and today, there are enough
differences to prompt Morgan Stanley
Executive Director Jeremy Friesen to
predict a more rapid recovery this time
around. Friesen presented his arguments
to the Texas Alliance of Energy Producers
annual meeting during a "surviving the
downturn" seminar on April 22 in Wichita
Falls, Tx.

the supply-driven price collapse of 1986
in real dollar terms, as do the first few
months of recovery. Despite the similarities, which include a futures curve that
suggests a similar long, slow path to
price recovery, Friesen told the Alliance,
"There are different circumstances now
that lead me to believe we will have a
much more bullish recovery than we had
in 1986."
A very important one, he emphasized,
is the Organization of Petroleum Exporting
Countries' production capacity. He recalled
that in the years preceding the '86 collapse,
Saudi Arabia had cut its production from
10.0 million barrels a day to 3.5 MMbbl/d.
"Thus, Saudi Arabia had significant spare
capacity that weighed on the market for
the next five years," Friesen reflected.
"We don't have that now."
He estimated the post-1986 supply
overhang at 12 percent of market demand,
compared with 1-2 percent today.
Another difference, Friesen went on,
is the rate of substitution. He demonstrated
that the rate of fuel substitution for oil-
both renewable and nonrenewable-during
the first half of the 1980s actually was
greater than in the first half of the 2010s.
"Oil was a big part of the power grid at
that time, so you had coal, nuclear and
biomass doing a significant amount of
substitution.
"Even after the shock," he continued,
"you still saw significant follow-through
because nuclear plants kept coming on
and the coal revolution was occurring."
Today, Friesen calculated, "A lot of
the low-hanging substitution fruit is gone,
and it will take a decade or two for solar
and wind to be of any real significance."
Demand Factors
Turning to demand, Friesen observed
that historically, both U.S. gasoline demand and vehicle miles traveled had increased in a nearly straight line, dipping
somewhat during periods of recession,
but then recovering. However, that trend
was broken following the 2008 recession,
he said, "and many people-including
me-thought we were at peak gasoline
demand."
They were wrong. In the past year,
"despite better mileage, and despite electric
cars and hybrids, we now have beaten
our record and seem to be tracking back
up," Friesen reported.

Another measure is per capita global
oil production. While the growth rates of
both global oil production and population
are decelerating, the decline in production
growth is greater, so that "we actually
are producing less oil per capita every
year, even with this great growth in shale
oil production," Friesen said.
Meanwhile, per capita consumption
in the United States, while also declining,
still remains four times the world average,
Friesen noted, and is probably six-eight
times per capita consumption in China
in India. Reasoning that per capita consumption had to fall even more in the
United States to allow it to increase in
developing countries, Friesen explained,
"Prices are what incentivize U.S. consumers and industry to become more efficient to allow (developing) countries to
share in the oil world. Oil prices need to
be high not only to economize the overall
oil industry, but to redistribute it."
Decline rates are another factor suggesting a more rapid price rise, Friesen
said. Noting that global decline rates historically have been assumed to be about
5 percent, he said he compared annual
changes in non-OPEC production prior

Mezzanine capital may provide an option
for independent producers that find their
bank loans out of compliance in the face
of lower oil prices, advises Gary L. Stone,
vice president of engineering at Five
States Energy Capital, during the Texas
Alliance of Energy Producers annual
meeting, April 21-22 in Wichita Falls, Tx.

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