The Trend of thc Petroleum Situation

THE outstanding features of 1926 in the petroleum industry included the following :

1. Stocks of all oils (crude and refined) were reduced, making the first annual decline since 1918.

2. Ilomestic crude oil production increased steadily during the last 11 mont,hs of the year, accelerating during the fourth quarter, and ending the year a t the highest level ever attained.

3. Three new major oil fields were developed-Panhandle, Spindle- top and Seminole.

4. Important advances were registered in production technique, t.ending to retard the declines of old wells and to maintain the flush periods of new wells.

5. The problem of gaining greater economic control of production t.hrough unit operations and gas conservation received growing recogni- tion by the industry and the Federal Oil Conservation Board.

6. The rate of drilling was sharply increased during the second quarter of the year and suffered only a very slight retardation during the clos- ing months.

7. The runs of crude oil to stills were maintained above normal throughout the year and underwent acceleration during the fourth quarter.

8. The gasoline situation was marked by a continuous and substantial increase in the rate of production of cracked gasoline, and by nn improve- ment in the statistical position of thc commodity.

9. Prices of both crude petroleum and its principal derivatives were characterized by more profitable levels and greater stability than for a number of years past; and, while showing declines during the fourth quarter, prices did not recede sufficiently to slow down materially either drilling or refinery operations.

The keynote of 1926 was a reduction in stocks of all oils to the extent of npproximately 24,000,000 bbl., or 4.4 per cent., of which roundly

Consulting cngineer. 780

JOSEPH E. POGUE 781

8,000,000 bbl. represented a fire loss in California, leaving 16,000,000 bbl. as a measure of the deficiency of current supply. This reduction in stocks, while moderate in view of the 518,000,000 bbl. .still on hand, is nevertheless worthy of note following a 7-year period of growing inven- tories, as shown in Table 1.

TABLE 1.-Supply of7 Demand for, and Stocks of All Oils in the United Slates by Years, 1918-1926

Data largely from Federal Oil Conservation Board and U. 8. Bureau of Mines Stocks Calculated by Author

Year Demand

(Millions of Bbl.)

Supply (Millions of

Bbl.)

Stocks Change (Approximate) sz,"c"$

Per Cent. ( M E ? of 1 gp$t!,t.

a December estimated. This figure does not include 8,000,000 bbl. fire loss. Includes 5,000,000 bbl. fire loss.

It may be noted from Table 1 that in 1926, as compared with 1925, the supply of all oils increased 2.1 per cent., while the demand for all oils increased 7.2 per cent.

The rate of change in stocks of all oils by months from 1922 to the present is shown in Fig. 1. This diagram illustrates the marked improve- ment in the statistical position of the industry that characterized the latter part of 1925 and nearly all of -1926, as compared with the pre- ceding period. The closing months of 1926, however, may be observed to have undergone a progressive impairment in position as compared with the earlier part of the year.

PRODUCTION

Production of crude petroleum in the United States in 1926 declined during the early winter, increased steadily during the spring and summer, and mounted sharply during the fall, ending the year a t approximately 2,400,000 bbl. per day, the highest level ever attained. (See Fig. 2.) For the year as a whole the output totalled about 767,000,000 bbl.,

782 THE TREND OF THE PETROLEUM SITUATION

an increase of 11,000,000 bbl., or 1.3 per cent., over the quantity pro- duced in 1925. As shown in Fig. 2, the 1926 output ran below the 1925 levels during the first 7 months of the year, but forged progressively ahead thereafter.

FIG. 2.-DAILY RATE OF a R 0 S S PRODUCTION OF CRUDE OIL I N THE UNITED STATES IN 1926 COMPARED WITH 1925.

The marked expansion in production was caused primarily by the development of three major fields, the exploitation of a much greater number of smaller pools, and the application of improved production technique that operated to retard the normal decline of old wells. The part played by the three major fields-Panhandle, .Spindletop and

JOSEPH E. POGUE 783

Seminole-is shown graphically in Fig. 3, which illustrates the rapidity with which these three sources of supply came into prominence under the influence of intensely competitive drilling. The contribution made by improved production technique was very important, although it is impos- sible to measure this factor statistically. A survey of the weekly produc- tion figures for individual pools, however, as reported by the American Petroleum Institute, will reveal the extremely slow rates of decline that characterized the settled elements in the national production. A specific example of arrested decline is shown in Fig. 4B, which illustrates the

Spindle Top

I Seminole

FIG. 3.-COURSE OF PRODUCTION I N THE THREE NEW MAJOR OIL FIELDS EXPLOITED IN THE UNITED STATES I N 1926, ILLUSTRATING THE l3APIDITY OF DEVELOPMENT UNDER COMPETITIVE CONDITIONS.

effect of the gas lift on production in the Dominguez pool in California. The application of air or gas under pressure to increase the flow of oil '

wells impressed itself on the 1926 aggregate output of petroleum and holds even greater promise for the future. At first directed only to old wells, these methods are now finding application in prolonging the flush flow of wells in the gusher stage and, where used, are radically altering the normal course of decline curves.

New factors of economic control also came into prominence, but more with implications for the future than as active forces bearing on current production. The desideratum of unit operations, as a means for reducing

784 THE TREND OF THE PETROLEUM SITUATION

competitive efforts in drilling and conserving gas for a more complete utilization as an extractive agent in the recovery of oil, gained much attention within the industry, and in the deliberations of the Federal Oil Conservation Board. - Examples of unit operations are even now not unknown in practice (see, for example, Fig. 4A). There is a natural

BIG LAKE POOL 100,00u I I

. ' I

1925 1 1926 ~ '0'000 A. Arrested Peak

DOMINGUEZ POOL roo,ooo,l

10,000 1 1925 1 1926 B. Arrested Decline

FIG. 4.-DIAGRAMMATIC ILLUSTRATION OF TWO NEW ECONOWIC FORCES AFFECTING CRUDE OIL PRODUCTION IN THE UNITED STATES. A. ARRESTED ACCLINE OF AN OIL POOL AB A RESULT OF ECONOMIC CONTROL OF DRILLING UNDER MON-COMPETITIVE CONDITIONS (UNIT OPERATION). B. ARRESTED DECLINE OF AN OIL POOL AB A RESULT OF IMPROVED PRODUCTION TECHNIQUE.

tendency in this direction through the leasing of large blocks in less popu- lated regions and as a result of the newer methods of geophysical search- trends that will doubtless become more important in the future as wild- catting moves further from the individualistic stage.

During 1926, 18,032 oil wells were completed east of California with a total initial production of 3,299,000 bbl., as compared with 15,611 oil wells with a total initial of 3,793,000 bbl. in 1925. At the close of 1926, there were 5891 rigs up and wells drilling east of California, an increase of 1184 over December 31, 1925. Table 2 gives the trend of drilling activities in the United States (exclusive of California) from 1913 to the present. During recent years, the number of operations are less but the calibre of the wells is larger, reflecting the results of deeper drilling.

The trend of drilling operations during 1926 and three years preceding is shown in Fig. 5, which also illustrates t,he high degree of correlation existing between drilling operations and price. A cut in the price of crude oil operates to slow down drilling activities, while an advance in price stimulates the starting of new wells and is soon reflected in a rise in the number of completions. I t may be observed from Fig. 5 that

JOSEPH E. POGUE 785

TABLE 2.- Well Data Covering the Oil Fields of the United States (Exclusive of California) b y Years, 1913-1926

Data from Oil and Gas Journal

Year 1 Number of Oil Wells Completed

l0,OOO 8 , 0 0 0

6 , 0 0 0 5 ,000

4 , 0 0 0 rr, -

3,000 3 . 0 0 ,

% L L

: 2 , 0 0 0 L5

w 2 . 0 0 cO,

I) 0) a E 3

Z E 6 -

1,000 1.00 2

500

FIG. 5.-TREND OF DRILLING OPERATIONS EAST OF CALIFORNIA BY MONTHS, 1923- 1926, SHOWINGTHE HIGH DEGREE OF CORRELATION WITH PRICE, AND THE MOMENTUY MAINTAINED AT THE CLOSE OF 1926.

Tgti:%g, :$' Average Initial

Dp"ai$rIuc~~ Number of Rigs Up and Well. Drilling

End of Year

786 THE TREND OF THE PETROLEUM SITUATION

drilling operations were only moderately retarded by the price declines in the closing months of 1926, and 1927 was entered with relatively considerable drilling momentum.

The best criterion of refinery operations is the monthly volume of crude oil charged to stills. The actual figures as reported by the U. S. Bureau of Mines, however, are rendered more significant if adjusted, by appropriate methods, for the seasonal and growth elements and thus converted into an index expressing the runs to stills in percentages of computed normal. This procedure has been followed and the results are presented graphically in Fig. 6. This diagram indicates that for the past two years refinery operations have rangcd substantially above computed normal, thus correlating with business activities in general and reflecbing the larger demands prevailing for petroleum products.

FIG. 6.-INDEX OF REFINERY OPERATIONS I N THE UNITED STATES BY MONTHS, 1918- 1 9 2 6 .

Refinery activities have shown an upward trend during the latter three- quarters of 1926, with a sharp upturn during the closing months of the year. The year 1927 is entered with refinery operations (as well as drilling and production) displaying a relatively high degree of momentum.

The outstanding features of the gasoline situation in 1926 were: the maintenance of a remarkably large demand, averaging about 42,000,- 000 bbl., or 17.3 per cent., over 1925; an important increase in the output of cracked gasoline, amounting to 22,000,000 bbl. or 32 per cent., over the production of this type of gasoline in 1925; and a slight reduction in the quantity of gasoline held in storage. These features are shown in the following table :

JOSEPH E. POGUE 757

TABLE 3.--Gasoline Data i n 1925 and 1926

Production Production Other Domestic C h n n ~ o Stocks

Cracked Gasoline s',";:: Consump Exports from Rnd of Year 1 Gasoline 1 (Million Previous Year

(31i~ion lLz8 31i10n o n , ~ b 1 . l ('IiUion year. (AIiUion Bbl.) I (hliUion I Bbl') 8.1.) Bbl') Per Cent. Bbl.) I Bbl.)

l

a December e s t i m n t e d . Subject to revision.

The rate of growth in the demand for gasoline over the last 10 years has been a remarkable feature of the oil business. During this period, the annual rate of growth, determined by fitting a compound interest curve to the data by the method of least squares, has been 17.5

1926

PIG. 7.-TRENDS OF SIGNIFICANT ELEMENTS I N THE GASOLINE BITUATION BY MONTEIS, 1 9 2 5 - 1 9 2 6 . A. PERCENTAGE RECOVERY OF GASOLINE FROM CRUDE OIL AND PROPORTION OF TOTAL GASOLINE OUTPUT CONTRIBUTEII BY CRACKING. B. DAILY RATE OF PRODUCTION OF CRACKED OARO1,INE BY YONTRS, 1925-1926.

per cent. The equation of this fitted curve is: Y = 68.0 (1.175)", origin a t 1917, unit = 1 million barrels. The data together with the fitted curve are shown in graphic form in Fig. 11.

The trend of the output of cracked gasoline is shown by months for 1925 and 1926 in Fig. 7B, while the relation of this factor to the total supply of gasoline and the ratio of total gasoline production to the

788 THE TREND OF' THE PETROLEUM SITUATION

volume of crude oil charged to stills is displayed in Fig. 7A. I t is seen that the increase in output of cracked gasoline hasbeen substantial and progressive and a growing proportion of our crude oil supply is being converted into gasoline.

FIG. 8.-CORRELATION BETWEEN STOCK8 O F GASOLINE I N THE UNITED STATES (EXPRESSED IN PERCENTAGES OF COMPUTED NORMAI.) AND THE SPOT PRICE OF MOTOR GASOLINE AT WHOLESALE ON THE TULSA MARKET, BY MONTHS, 1918-1926.

A further interpretation of the gasoline situation is presented in Fig. 8 which shows by months from 1918 to the present, the correlation existing between stocks of gasoline in the United States (corrected for seasonal and growth) and the spot price of 58-60 motor gasoline on the Tulsa market. This correlation, and the technique underlying it, was presented1 a t the 1925 annual meeting of the Institute, and i t is here

J. E. Pogue: The Relation between Price and Stocks of Gasoline. petroleum Development and Technology in 1925. 732-737. A; I. M. E. Pamphlet No. 1570-G.

JOSEPH E. POOUE 789

shown with t,he 1926 data added. I t may be observed that the trend of the gasoline situation since 1923 has been in the direction of statistical improvement, although the situation lost strength during the second half of 1926 and 1927 was entered with a gasoline carry-over above "normal," though relatively smaller than the carry-over into 1926.

During the year a new element made its appearance in the gasoline situation, which may have some bearing upon both future supply and price. This new element arises out of competition for the favor of the consumer, and is taking the direction of improvement in the quality of the product. A number of companies, responsible for a sizable proportion of the country's gasoline output, have standardized on a higher-gravity lower-end-point product which is designed to improve the quality, if not the efficiency, of performance in the motor. The extent to which this lnovement will go is not yet clear, but the effect of the tendency is to cut down the percentage of straight-run gasoline derivable from a barrel of crude oil and probably also to add a further stimulus to the growth of cracking.

The outstanding economic factors in respect to kerosene and fuel oil are found in the ratios of the production of each of these products to the volume of crude oil charged to stills. As shown in Table 4, the percent- age recovery of these two products has for several years shown a

TABLE 4.-Trend of Production, and Percentage Recovery, of Kerosene and Fuel Oil by Years, 1922-1926

a December estimated.

Production Crude Oil

Run to Stills (Million Bbl.) Kerosene Fuel Oil 1 (Million Bbl.) I ( M i i o n BbL)

downward trend. The cause of this changing relationship is primarily the growth of cracking and secondarily progressive improvements in the effi- ciency of fractionation. The recovery factors for kerosene and fuel oil, therefore, bear a reciprocal relation to the recovery factor for gasoline.

The development of fuel oil through cracking as a second important source of gasoline has brought a revolutionary economic force into the petroleum situation. For the period that cracking can continue to

Recovery per Barrel of Crude to Stills

Kerosene, Fuel Oil P i Cent. I Per c e n t

790 TIIE TREND OF THE PETROLEUM SITUATION

expand adequately, this factor has divorced the price of gasoline from the price of crude oil '(see Table 6) and set up fuel oil as the great equalizing element between the supply of crude oil and the demand for gasoline. Thus the economics of petroleum rests upon a triangle of forces, which are interdependent and to a large degree automatic in adjustment. When there is a deficiency of crude oil, crude oil prices advance, profits in mak- ing cracked gasoline become larger, and cracking plants are built in grow- ing numbers until the demand for gasoline is met from relatively less crude petroleum; there being a corresponding decrease in the output of fuel oil, whose elastic demand contracts proportionally. When the crude oil sup- ply, on the contrary, becomes too large, crude oil gets cheaper, the profit incentive for expanding cracking operations loses force, and more crude oil is converted into fuel oil, whose dcmand is quickly responsive to a low- ering of price. These relationships will serve to interpret many of the price movements of the past few years.

An important feature of the oil business in 1926 was the substantial increase in exports, which showed a gain of 18,400,000 bbl., or 16.8 per cent., over 1925. The trend of the principal elements composing the export movement is shown in Table 5, whcre it appears that the chief component in the gain was gasoline, which showed an increment of 12,500,000 bbl. or 39.4 per cent. The large overseas movement of gaso- line was an important element in maintaining domestic prices for this commodity.

TABLE 5.-Exports of 041 from the United States by Years, 1922-1926 (in Millions of Barrels)

Year Crude Oil Gaaoline I Fuel Oil ' Other Products Total, All Oil

a December estimated. Figures subject to revision.

During the closing months of 1926, the large water movement of oil resulted in a shortage of tankers and a consequent rise in tanker rates, with important results in oil markets.

One of the striking features of 1926 in the petroleum industry was the progress gained in the direction of price stabilization. This trend

JOSEPH E. POGUE 79 1

is graphically indicated by Fig. 9, which shows for the last 5 years monthly index numbers representing the weighted average price of crude petroleum and petroleum products in the United States. I t may be readily observed that the amplitude of the price cycle was less in 1925 than in 1924, and still less in 1926 than in 1925.

PIG. 9.-RELATNE PRICES OF CRUDE PETROLEUM AND PETROLEUM PRODUCTS IN THE UNITED STATES BY WONTHS, 1922-1926, ILLUSTRATING THE TREND TOWARD PRICE fiTABILIZATION DURING THE PAST TWO YEARS. (PRICES IN 1919 = 100.)

A more detailed analysis of price movements during 1926 is afforded in perspective by Table 6 and Fig. 10. The tabular and graphic data there presented represent a continuation of the index numbers of oil prices previously published by the a u t h ~ r . ~ Table 6 indicates that oil prices in 1926 averaged higher than in 1925, the percentage changes running as follows:

PER CENT. Crude oil =.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . + 3 .5 Gasoline =. . . . + 5 . 8 Kerosene =.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . +19.9 Fueloil =. + 0 . 8

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Lubricants = 0 . 0

Fig. 10 shows that oil prices tended to advance during the first half of the year, displayed relative stability during the third quarter, and receded during the fourth quarter. The declines, however, were less severe than the corresponding recessions of a number of previous years.

In terms of the general price level of all commodities, the average prices of gasoline and fuel oil during 1926 stood a t 76 per cent. and 91 per cent. respectively, while the prices of crude petroleum, kerosene, and lubricants averaged 118 per cent., 124 per cent., and 113 per cent., respec-

. . . . - . . .

2 5. E. Pogue: The Trend of Prices in the Petroleum Industry. Petroleum Development and Technology in 1925. See pp. 738.744 for explanation of index numbers. A. I. h1. E. Pamphlet So . 15704 .

792 THE TREND OF THE PETROLEUM SITUATIOS

TABLE 6.-Trend of Relative Prices of Crzde Petroleum and Its Derivatives in the United States, by Years from 1913 to 1926 Inclusive, and b y

Months, 1926

Prices in 1913 = 100

By months , 1926

January.. . . . . . . / 165 February.. . . . . . I 177

. . . . . . March.. . ! 176

April . . . . . . . . . . 176 May . . . . . . . . . . . 183 June.. . . . . . . . . . ' 188

July . . . . . . . . . . 186 August . . . . . . . . 184

. . . . September. 182

October . . . . . . . . 182 . . . . November.. 174

. . . . . . December. 163

tively. The relative cheapness of gasoline is worthy of particular note during a year when crude oil stocks were reduced. The trend of crude oil prices in percentages of the general price level (that is, corrected for variations in-the purchasing power of the dollar) is given for the last 14 years in Table 7.

JOSEPH E. POGUE 793

TABLE 7.-Index Numbers of Oil Prices Expressed i n Percentages of the Average Price Level of All Commodities

Prices of All Commodities = 100

a U. S. Bureau of Labor Statistics.

FIG. 10.-TREND OF THE RELATWE PRICES OF CRUDE PETROLEUM AND ITS PRIN- CIPAL DERWATNES IN THE UNITED STATES BY MONTHS, IN PERCENTAGES OF THE AVERAGE PRICE8 I N 1913 AND I N COMPARIBON WITHTHE GENERAL PRICE LEVEL. (PRICES I N 1913 = 100.)

All ~ommoditiea.

100 100 100 100 100

100 100 100 100 100

100 .lo0 100 100

Year 1 P>i$:m I Caaohe 1 Keroeena I Fuel Oil 1 Lubgf~ting

1913 1914 1915 1916 1917

1918 1919 1920 1921 1922

1923 1924 1925 1926

100 87 67 80 83

98 72

116 83

. 79

74 85 86 91

100 103 96 94 71

103 101 140 122 89

81 99

107 113

100 85 65 92 88

100 96

133 111 105

98 107

100 80 74 95 75

72 69 75 97 95

73 68

100 99 89 80 61

67 79 96

112 106

106 108 .

108 67 118

98 124

THE TREND OF THE PETROLEUM SITUATIOS

As a summary of the major trends that have manifested themselves in the petroleum situation, Fig. 11 is presented. This chart shows for a period of years the demand for gasoline, the domestic production of crude petroleum, and the ratio of gasoline produced to crude oil charged to stills. To each set of data a trend line, or series of trend lines, has ,

been fitted. These trend lines are compound interest curves fitted by the method of least squares; as the data are plotted on semi-logarithmic paper, the trends appear as straight lines. Production has changed its

Dollars per Barrel

PIG. 11.-DIAGR.\MMATIC REPRESENTATION OF THE BASIC ECONOMIC TRENDS I N THE PETROLEUM IhVUSTRY, IlrLUSTRATING THE BEARING OF THE INCREASING RECOVERY OF GASOLINE UPON THE QUANTITY OF CRUDE OIL REQUIRED TO MEET THE DEMAND FOR GASOLINE. TREND LINES ARE COMPOUND INTEREST CURVES FITTED TO THE DATA BY THE METHOD OF LEAST SQUARES.

trend twice during the period shown; the trends of the other two factors continue through 1926 unaltered. The chart illustrates how the rapid growth in the demand for gasoline has been met by a crude oil supply expanding (with the exception of a brief period, 1920-23) atasubstantially slower rate. The present trend of the crude-production and gasoline- demand curves cannot be safely projected into the future; it is probable, however, that the ratio curve for some time ahead will tend to follow its present course, continuing to multiply by a growing factor the eco- nomic value of the barrel of crude and relieving the supply of crude oil from the necessity of fully keeping pace with the further expansion in the demand for gasoline.