Petroleum Economics - The Trend of the Petroleum Situation

THE past year in the petroleum industry was one of overproduction, rising inventories, low prices, and meagre to vanishing profits. This outcome was the result of a long period of intensive and uncompensated effort on the part of both financial and industrial interests, to stimulate supply on the theory that the primary problem facing the petroleum industry was the development of an adequate reserve of raw material to protect a large and ever-growing investment. The stimulus was applied in various forms and through diverse channels: capital had, long flowed into the industry in excessive amounts under the attraction of large expected profits; the price level for crude petroleum had persistently been influenced -by speculative considerations, with the result that prices declined slowly in periods of flush production and were quick to advance in anticipation of statistical improvement, thus maintaining a superfluous degree of stimulus on wildcatting and on drilling; speculation in inventories had led to the unsound, or at least unusual, business practice of accumulating huge stocks of oil; and, above all, the industry had directed the potent force of technology to the expansion of supply and achieved radical results in accelerating oil discovery, speeding up the rate of oil extraction, and enlarging the recovery of gasoline and lubricating oils from the raw material. In short, the economic conditions of 1927 were exactly those to which the objectively driven enterprise of the petroleum industry had long been directed; and the undesirable financial consequences arising. therefrom reflected no lack of success in what had been set out to be achieved, but rather the failure to have established concurrently the necessary means of economic control to prevent the immediate conversion of reserves into current supply, and likewise the oversight in neglecting to apply the technological force to the enlargement and diversification of the market for petroleum products. Perhaps, when viewed in its longer perspective, 1927 will stand out as the turning point in the economic policy of the petroleum industry, when the technique of rationalizing production made its, initial claim for recognition.