As the University of Wyoming makes its transition to a Tier 1 university in energy research, a UW professor discussed what to take into consideration when making decisions with oil and natural gas.
UW Economics Professor Chuck Mason gave a presentation on Thursday to an energy class at the Energy Innovation Center. Mason said oil production – finding the oil, assembling a crew, gathering equipment and storing the oil –is the easy part. The risky part of oil production is predicting the future prices of oil. The sooner you purchase land, the better price you get for the land, he said.
“The moral of the story is that oil and gas is risky,” said Mason.
Mason backed his claim with data showing the probability of failed oil exploration was around 70 percent from the 1970s through 2000. The likelihood of failure has dropped to around 25 percent in the past decade. Similar trends exist with the likelihood of failing to develop oil as well.
In order to best deal with unknown prices, Mason said oil companies utilize an economic phenomenon known as arbitrage, the practice of simultaneously purchasing oil in one market and sell that oil to another market. Companies then purchase oil in one market where prices are low and then sell that purchase to another market at a higher price. This helps insure oil can be purchased at a fair value over time even when prices seem unpredictable.
Those in the oil business, though, face many legal challenges with their work. Most notable perhaps is oil drilling’s effects on the environment. The further down you drill, the more risk you take on of harming the environment, Mason said.
“You care about ecological trouble not because you’re a nice guy, but because you’ll get your butt sued,” he said.
Mason said prices for natural gas fluctuate yearly. The cause of these fluctuations, he said, is the change in demand for every season. In the winter, more natural gas is needed to heat homes and buildings. In the summer, more natural gas is used for electricity. During spring and fall, weather and temperature is much more moderate thus air conditioning and heating are not needed as much.
This adds a lot of risk for natural gas companies, as the uncertainty of demand during these seasons is great.
“People make and lose a lot of money when trading gas because of the risk predicting demand every season,” said Mason.
Natural gas prices did not always fluctuate as much as today. Before the 1980s, more regulations were in place that did not allow natural gas companies to maximize their profits as they can do more easily today. Since the 1980s, natural gas regulations have progressively been lifted.
With natural gas being as big as it is today, it is not permitted under U.S. law to export. This ban has recently come into question with the present situation in Ukraine and their heavy reliance on Russian natural gas.
UW’s College of Engineering announced an initiative in April of last year to advance the university to Tier 1 status. Stemming from Governor Matt Mead’s letter to the 2012 Wyoming Governor’s Energy, Engineering, STEM Integration Task Force, a Tier 1 university, as deemed by The Association of American Universities, is a recognition of “engineering excellence.” Examples include California-Berkeley and University of Colorado-Boulder. UW recently accepted a $3 million donation from Halliburton to advance energy research.
