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Chad Warmington

Sound policy will help smooth out ebbs, flows of oil market

December 03, 2018
By Chad Warmington

Since their recent peak on Oct. 3, Oklahoma crude oil prices have plunged 33 percent as better-than-expected growth in U.S. crude oil inventories and the OPEC countries’ ambiguous plan to cut production have pushed oil prices down.

While we hope crude oil prices soon begin to trend upward, the recent fall in prices serves as a stark reminder of the volatility of the oil and natural gas industry.

The ebbs and flows of commodity prices are a part of doing business as an oil and natural gas producer. Much like farmers and ranchers who sell their cattle and wheat at market prices, crude oil and natural gas producers in Oklahoma have no say in what price their product brings. They simply take the price the market gives them.

This is a good example of why government policies that encourage oil and natural gas investment in Oklahoma are important. Lowered commodity prices reduce profit margins. As those margins thin, producers will look to states where they will see the greatest return on their investment.

Because it’s not just oil and natural gas producers who feel the pinch when prices fall. The working Oklahomans who work in our state’s historic oilfields — one out of every six Oklahoma employees — are the first to see the impact as drilling slows. The economic impact ripples throughout Oklahoma’s economy with fewer trips to the convenience store, fewer hotel rooms occupied and fewer seats filled at the local diner.

That decrease in economic activity serves as a double whammy for state coffers. Already impacted by gross production tax collections that follow the ups and downs of commodity prices, the reduction in sales tax, income tax and corporate tax collections compounds the issue for a state budget built on the oil and natural gas industry.

The Oklahoma economy continues to benefit from the strength in its defining industry. It is unwise, however, to assume that current levels of production, employment and drilling will sustain themselves indefinitely into the future thanks to an ever-volatile commodity market. Policymakers should begin to focus now on practices that will help the state manage the economic cycles that surely lie ahead.

Chad Warmington is president of the newly-formed OIPA-OKOGA, a trade association representing the entirety of Oklahoma’s oil and natural gas industry. This column first appeared in The Journal Record.
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