High cost of cheap gasoline

There's an unsettling quiet in the winter air as Dan Wallace and Melvin Moran walk through a junkyard of rusty oil derricks and old nodding-donkey oil pumps. To an outsider, it has the solemn overtones of an elephant graveyard. To these two oil men, it's a sign of things to come.

"That's sort of where we're headed," says Mr. Wallace, a gravel-voiced, bean-pole of a man who has made a living in the Oklahoma oil fields all his life. "Now, we could either do something about the price of oil, or that is where we're headed."

For more than a year, the slowdown in the hard-driving Asian economies has meant less demand for oil, leading to a worldwide glut. The price of crude is now lower than it's been in more than 50 years, and prices at the pump haven't been this low since Jimmy Carter introduced Americans to the French word "malaise."

Understandably, much of the American public has responded to these cheap prices with a resounding huzzah. But for the small independent producers who account for the bulk of America's domestic oil supply, these are desperate times indeed, with implications that affect not only a rural way of life, but also America's long-term competitiveness abroad.

"The impact is devastating for American independents," says Daniel Yergen, chairman of Cambridge Energy Research Associates and author of a seminal history of oil, called "The Prize." "The independents have been the backbone of the industry and certainly the backbone of domestic exploration. They're the people who add to our reserves and offset the powerful decline in domestic production. At the end of the day, if this goes on too long, these guys will be gone."

The statistical outlook is grim. In the past year and a half, oil prices dropped from $18 a barrel to about $10 a barrel, and they show no sign of rising in the next year. At around 94 cents a gallon on average nationwide, gasoline is half the price of a gallon of bottled water. (In oil-patch towns, the price is much lower, around 71 cents a gallon for unleaded.) More troubling is that American dependence on foreign oil has almost doubled since the 1970s, from 30 percent to 55 percent today.

Responding to the lower profits, many major oil companies have cut costs by merging with each other, as British Petroleum and Amoco did, and more recently as Exxon and Mobil did. In total, the oil industry has laid off almost 39,000 workers in the past four months alone, says Chicago-based outplacement expert John Challenger, and the skills required for these highly specialized jobs are not easily transferred to other industries.

Here in Seminole, a small town that once accounted for an astounding one-third of the world's oil supply in 1927, the current oil crunch has hit like a punch in the gut. Storefronts on the brick-lined Main Street are a line of empty glass windows, a far cry from the boom days when a still-undiscovered Clark Gable was a roustabout here and Harry Truman was considering opening a branch of his haberdashery. (Truman left in a huff after being splashed with mud and never returned.)

But most of the damage to Seminole was done in the last oil bust of 1986, a time when the town's 200 oil-related businesses quickly dwindled to 20, leaving only true believers like Dan Wallace and Mel Moran to keep the wells pumping.

"The great thing about oil," says Mr. Moran, "is that when you take it out of the ground, you're creating wealth. In the service industry, you're not expanding wealth, you're just passing money around." He has kept Moran Enterprises running at a high personal cost: He borrows money to make payroll, and dips into his IRA to meet operating expenses. To date, he has not laid off anyone, but he's not sure how long he can hold that position.

Wallace has not been so fortunate. His oil exploration company, Columbus Oil, has been pared down to five people from 14 a year ago; and his oil service company, Wallace Inc., has only one employee out of 20 remaining. Even this last worker has just given notice; he's seeking more secure work elsewhere, leaving the oil industry altogether.

For his part, Wallace blames a US foreign policy that uses US troops to protect Middle Eastern oil supplies, the very countries that are overproducing and undercutting American competitors.

"I understand why Americans like cheap oil, but it's not really cheap," says Wallace, sitting in an office packed with paintings, posters, and statues of John Wayne. He knows that Saudi oil officials claim their cost for producing oil is around $2 or $3 a barrel. But Wallace notes that the US spends $1.6 billion to run a Naval carrier group in the Persian Gulf. By his own calculation, this adds up to $140 per barrel from that seaway. "You're paying for it one way or another."

At current prices, Wallace sells his oil for anywhere from $9 to $12 a barrel - but it costs him $13.75 a barrel to produce. As such, he has no choice but to follow his fellow producers in turning off his wells. With a grim face, he drives his white pickup truck out to a well called Stump No. 1, a onetime gusher discovered in 1981. He walks over to a gray electric power meter, and with a single flick of a switch, turns off Stump No. 1 - forever. "Those foreign boys won this battle," Wallace says, "but this is war, baby."

A few miles away, Eddie Johnson heads up a crew of four men who are preparing to repair a broken well on a nearby lease. It's grimy, dangerous work, where a falling bolt or a mislaid tool can mean injury or death. In good times, the crew would work six days a week. In these times, they're working mostly half-days.

"You can't raise a family with that," says Mr. Johnson, a forty-something man who has worked in the oil fields since high school. "That makes it harder to pay rent."

"And car payments," adds Mark Sanders, a coworker.

"And child support," mutters Ramon Olvera. The men chuckle in commiseration.

The impact has been big enough to force lawmakers in this oil-dependent state to call a special session to find budget cuts when tax revenues came up short. State energy officials, such as Denise Bode, have found themselves in a position to push for tax relief for the people they regulate. At stake is nothing less than national security, says Ms. Bode.

"As we lose control of our resource base for oil, we lose the ability to control our own destiny," says Bode, Oklahoma's top energy official. "Look at what Ronald Reagan did. He encouraged Saudi Arabia to drive up their production, bring down the price of oil, which was a major source of revenue for the Soviet Union. And you know the rest of that story."

"Oil is power," she adds. "Once these other countries eliminate American producers and achieve market share in this country, they're going to increase prices."