The state of oil prices

In February 2008, the price of oil was in the $90 range and heading higher.

Oil peaked at $147.27 per barrel on July 11 and times were good in West Texas.

Oilfield workers were in demand and companies paid top dollar to get all hands on deck.

On Friday, oil prices settled at $37.51 per barrel after falling below $40 this week and hitting a new low for the year on Thursday of $33.98 per barrel.

 The rapid decline has slowed things down in Permian Basin oilfields with some companies laying off workers and stacking rigs. Did anyone see the reversal coming?

"I certainly think most people did not anticipate it," said independent oil producer John Bell of Bell Energy in Kermit.

The cause of the drop in oil prices is complex, and opinions vary as to why it happened.

"I think our current oil prices are certainly related to what's going on in America and the world," Kirk Edwards, president of MacLondon Royalty Co. in Odessa, said.

Jon Morgan, president of Anthem Oil and Gas in Midland, agreed.

"A lot of it is just going to depend on this economy. If this economy comes back, I think it will sustain prices," Morgan said.

Bell criticized the Bush administration for continuing to fill the Strategic Petroleum Reserve and contributing to the run up in oil prices in 2008. Although the Bush administration suspended filling the reserve last summer, the damage was already done, Bell said.

"They waited too long. If there's a shortage, don't make it worse by putting oil in storage," Bell said.

According to Bell, there have been 12 recessions in the United States since World War II. Of those, 11 have been preceded by a spike in oil prices. Professor Michael Economides of the Cullen College of Engineering at the University of Houston, said the run up in oil prices was also a factor in the collapse and a lot of it has to do with market psychology.

"There was no rational reason for $100 oil as there is no rational reason for $40 oil now," Economides said.

Many are wondering what is next and are hoping the price of oil rebounds.

"Clearly nobody knows which way the markets are going to go," Edwards said. "The confidence needs to be restored in the consumer right now."

While saying he would be foolish to speculate on the future price of oil, Bob Landreth, an independent oil producer in Midland and board member of the Independent Petroleum Association of America, said he's not optimistic.

"I think we're in for a pretty rough time for the next six to nine months," Landreth said. "I've been through several of these downturns before."

Part of the problem producers and well-service companies in West Texas are having in addition the low price of oil is the high cost of labor.

"One of two things needs to happen, we need vendor and service prices to drop or higher oil prices," Morgan said. "Unfortunately, a lot of that is labor."

Landreth said there has already been a 10 to 20 percent drop in well-service costs in the past couple of months, but more is needed as oil prices drop further. He said a 50 percent reduction in well-servicing cost is needed for most producers to make money at $40 per barrel.

"It's pretty rough at this point with the escalation of cost," Bell said.

The fallout of these problems is just now being felt, Landreth said.

"This is serious. It has consequences for a lot of things in the community," he said.

One of those is a possible reduction in charitable giving.

"Cash flow is just going to dry up," Landreth said.

But not everyone is pessimistic and one oil industry expert predicts a rebound in oil prices later this year.

"What most people tell you is they don't know what will happen. I'm not one of those guys," Economides said.

Economides said he sees the price of oil going from $40 per barrel now to near $200 per barrel in 18 months partly due to geopolitical issues. But he said some of the problem in the oil industry is the fear factor.

"They always want to believe the worst," Economides said.

As a result, a downturn feeds on itself.

"It becomes a self-fulfilling prophecy," he said.

Economides said the one thing that will certainly send prices up toward $200 is the headline, "Israel attacks Iran."

Barring that, Economides said that by September 2009, he is expecting the natural decline in production due to the aging of oilfields coupled with the reduction in drilling activity to bring the supply and demand into equilibrium.

"I expect a recovery of oil prices by then unless something unseen happens," he said.

Economides said that if he could control oil prices, a good level for them to be at would be $60 to $65 per barrel. At that price, producers in West Texas could turn a profit and exploration would ramp up.

Bell agreed and said a range of $60 to $80 per barrel would be preferable. Until then, the downturn could result in a loss of experienced workers and engineers.

"We don't need to go through another cycle of losing all our workers," Bell said.