HOUSTON - Workers at Marathon Petroleum's refinery in Gallup, New Mexico, are turning off the valves. Oil companies in West Texas are paying early termination fees to contract employees rather than drill new wells. And in Montana, producers are shutting down wells and slashing salaries and benefits.
"I'm just living a nightmare," said Ben Sheppard, president of the Permian Basin Petroleum Association, which represents companies in the area of Texas and New Mexico that became the world's most productive oil field last year. "We are worried that the current disorderly market has adversely damaged the industry," said Ben Luckock, co-head of oil trading at Trafigura, a large exporter of American crude."In the short term some form of government assistance is likely needed because the price levels we are currently transacting at are unsustainable for US producers."
Simply put, the global oil industry is producing vastly more oil than the world needs - about 30 million barrels a day too much. Even if the federal government started buying oil for the reserve immediately, it could absorb only half a million barrels a day, or less than 2 per cent of the excess world production.
The tanker operators, who can make more than US$100,000 a day for spot charters of their ships, may be the only ones making money right now. That is not true anymore. At least four customers have canceled purchases in recent days. One customer canceled contracts effective May 1 for 2,000 barrels a day, nearly 30 per cent of the company's output.