During the debate over the crude oil decontrol in the late '70s, the petroleum industry argued that removal of government price controls would be the single most important step towards increasing domestic oil and natural gas production and reducing the nation's dependence on foreign oil.
Since President Carter initiated decontrol in April 1979, the industry has backed up its arguments with performance: oil companies have taken the increased funds resulting from decontrol and heavily reinvested them in the search for and production of oil and gas. And the industry has produced some dramatic results in terms of all-time record-high drilling activity and increased production.
Oddly enough, some petroleum industry critics are ignoring these results and contending that oil companies are not investing heavily enough in petroleum exploration and development.
The record-breaking level of drilling activity in the United States is the most persuasive refutation of this charge. Consider these facts:
* More oil and natural gas wells were drilled in the US during 1980 than in any previous year. The number reached 60,845 - breaking the previous record of 57,077 set in 1956. The 1980 total was 22 percent more than in 1979 (49,816). During the first six months of 1981, the total number of wells drilled reached 33,987 - or 28 percent more than in the same period last year (26,554).
* The total footage of all wells drilled in the US also reached a record high in 1980. Total 1980 footage was 284 million feet - nearly 20 percent greater than 1979 (238 million feet). During the first six months of this year, the total footage of wells drilled was 157 million feet - nearly 25 percent greater than in 1980 (126 million feet).
* The number of rotary drilling rigs in operation also reached an all-time high in 1980, with 2,910 rotary rigs at work. This was a 34 percent increase over the 2,177 rigs in operation in 1979. The number of drilling rigs in operation during the first six months of 1981 was 3,659 - or 36 percent above the number of rigs in operation for this period last year (2,695).
This record-breaking drilling activity enabled the petroleum industry to increase production of US crude oil by over 13.5 million barrels during 1980. Daily crude oil production rose from an average of 8.55 million barrels a day in 1979 to 8.59 million barrels a day in 1980. And production of natural gas, which had declined from 1974 to 1978, increased in 1979 and remained just about steady in 1980.
US oil companies obviously could not maintain this record-high level of activity and produce these results without heavy investment in domestic energy production.
According to Oil & Gas Journal, oil industry spending in the US on drilling, exploration, production and outer continental shelf lease bonuses rose from $19. 9 billion in 1978 to $42.8 billion in 1980. The magazine's estimated figure for 1981 is $49.7 billion.
But some industry critics allege that major oil companies are spending less and less of their cash flow on exploration and production of oil and natural gas. They present figures that they claim prove that expenditures on exploration and production have not kept pace with either the increase in cash flow or the increase in funds from operations.
This conclusion is flawed - and the statistics presented to support the conclusion are misleading. These critics make the major analytical error of failing to count in the cost of property acquisitions when calculating oil industry capital expenditures figures. They ignore the fact that virtually all property acquisition expenditures (purchases, lease bonuses, etc.) are for petroleum exploration and production. It would seem obvious that an oil company cannot drill for oil or gas without acquiring the right to drill by paying compensation to the landowner. But the critics fail to recognize that critical point.
The US Department of Energy has refuted this erroneous and misleading argument. Studies of 26 leading US oil companies by DOE's Energy Information Administration show additions to petroleum investment in place were up 60 percent between 1978 and 1979, while funds from operations (internally generated cash flow) were up 43 percent. Petroleum investment rose faster than cash flow from operations. The DOE study also states: ''Investment patterns by FRS companies (the 26 companies in the DOE's Financial Reporting System sample), in 1979, indicated no substantial effort to diversify beyond petroleum. . . .''
Some industry critics charge that large oil companies are diverting a large share of their funds from decontrol to finance acquisitions of other firms, rather than reinvesting these funds in petroleum exploration and development.
But the critics exaggerate the extent of the acquisitions and fail to consider them in the context of the petroleum industry's overall performance. Historically, oil companies have not accounted for a disproportionately large share of acquisitions. The latest complete study by the Federal Trade Commission , covering 1963 to 1979, showed that oil companies acquired 14.5 percent of all acquired assets - and account for 17 percent of all assets during the corresponding period. And a recent survey by the American Petroleum Institute of 18 major oil companies, covering 10 years 1970 through 1979, shows that combined expenditures to acquire nonenergy firm assets of at least $50 million represented only one to two percent of total cash flow. Preliminary estimates for 1980 show that ratio to be about the same.
The petroleum industry's performance under decontrol proves to any reasonable observer that the funds from decontrol are being heavily reinvested in oil and gas exploration and development. US oil companies are producing results, not rhetoric.