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A Study of the Impacts of Domestic Energy Deregulation on West Texas Intermediate Crude Oil Prices and the Strategic Responses of United States Energy Companies

Abstract of the Student #Thesis: Steve Yallouz


On July 1, 2014, the benchmark price of crude oil in the United States (US), West Texas Intermediate (WTI), was trading at US$106.06 per barrel. In less than 18 months, the WTI price plummeted to US$35 per barrel. While there have been similar price declines in the past, this decrease has been the longest since the mid-1970s when the Organization of Petroleum Exporting Countries (OPEC) curtailed production to prop up global crude oil prices.

The implementation of federal and state deregulatory policies in the 1980s and 1990s encouraged the US energy industry to develop crude oil production and expand natural gas and renewable energy production in the subsequent decades. As a result, this appears to be the first time since the globalization of crude oil pricing that domestic energy supply sources have had a direct and prolonged impact on WTI prices.

The most recent WTI price decline, which began in June 2014, has now lasted over 550 days, with no imminent recovery to pre-decline price levels in sight. This current downturn is now the longest since crude oil became a global energy source in the late 1970s.

Objective

This research critically analyzes the recent drop in WTI prices, focusing on changing energy supply conditions and the impact of growing natural gas production and ongoing renewable energy development initiatives. It aims to:

  1. Forecast the impact of growing natural gas and renewable energy production on future WTI prices.

  2. Determine if a significant percentage of the recent price drop has a permanent component.

  3. Analyze the strategic responses of the US midstream and oil and gas production sectors to see if they have shifted their activities away from crude oil and toward natural gas and renewable energy.

Methodology

The research employs a mixed-methods approach, combining quantitative analysis of WTI price trends with qualitative analysis of industry responses. Data sources include historical WTI price data, production statistics for natural gas and renewable energy, and strategic plans from major US midstream and oil and gas companies. The study also reviews federal and state policy changes that have influenced energy production and examines market reports and forecasts from leading energy analysts.

Findings

  1. Changing Energy Supply Conditions: The significant increase in natural gas production, coupled with advances in renewable energy technologies, has created a surplus in energy supply. This surplus has exerted downward pressure on WTI prices.

  2. Impact of Natural Gas and Renewable Energy: The sustained growth in natural gas and renewable energy production is projected to continue, which may prevent WTI prices from returning to their pre-decline levels in the near future. The analysis indicates that a portion of the recent price drop could be permanent due to these shifts in the energy landscape.

  3. Strategic Industry Responses: Many US midstream and oil and gas production sectors have begun to adjust their strategies. There is a noticeable shift towards increasing investments in natural gas infrastructure and renewable energy projects, indicating a diversification away from crude oil dependence.

Conclusion

The prolonged decline in WTI prices reflects significant changes in the US energy supply landscape, driven by increased natural gas production and renewable energy development. This study highlights the potential for a permanent shift in energy pricing dynamics and underscores the need for strategic adaptation within the industry. As the US continues to diversify its energy portfolio, the future of crude oil prices will likely remain influenced by these evolving supply conditions.

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