Can Energy Sector Offset a Slump?

The Gulf crisis means investment in the US energy sector will rise, says Amoco's chief economist. Below, Alan Stoga argues that the Americas should work together to cut dependence on Mideast oil.

INVESTMENTS in the energy sector next year will help to offset a recession in other parts of the United States economy. That's what Theodore R. (Ted) Eck, chief economist of Amoco Corporation, says. Mr. Eck frequently testifies before Congress when it shapes legislation on issues such as clean air and taxes.

In an interview at the oil company's headquarters here, Eck cited several reasons why the oil business could come to the rescue of the US economy.

Concern over the Middle East. Regardless of the outcome of the current crisis, US petroleum production has declined this year by 400,000 barrels per day. Eck expects President Bush to announce the long-awaited National Energy Strategy as the centerpiece of his next State of the Union message, probably in late January. That strategy will call for steps to boost the efficiency of energy use and other measures involving government and private expenditures.

The current energy price structure. While oil has doubled, natural gas hasn't budged. ``The economics for gas-oil substitution are overwhelming. Last month there were more conversions from oil to gas heating than at any time in history.'' Drilling will rise 20 percent by the second half of 1991, depending on the availability of drilling rigs and rig crews.

The new tax bill. It provides for a 15 percent tax credit on all expenditures for enhanced oil recovery, provided that the price of oil is less than $28 per barrel. A tax credit is more valuable than a tax deduction because it is subtracted from the amount of tax to be paid. ``That's a powerful tool'' for promoting the activity, Eck says. The cost of an enhanced oil recovery program can be high. ``It's easy to put a billion dollars into a single field.''

The bill also broadens and extends subsidies on the production of coal seam gas and ``tight'' gas, two types of natural gas reserves that are difficult to extract.

The clean air bill. The refining industry alone will invest $50 billion over a four-year period to retool to produce gasoline with lower emissions. New emission standards for fleet vehicles in effect preclude fuels other than compressed natural gas, Eck says. ``I just don't see any alternative. The way I read the clean air bill, I see CNG vehicles.'' The automotive industry will spend $1 billion just to design a CNG engine, and will eventually redesign the entire vehicle, he says.

Four natural gas pipelines will be built to New England and California, costing ``hundreds of millions of dollars if not billions apiece.''

Eck says that one-third of all current capital expenditures in the US are related to the environment and energy. Spending in other areas is declining, so new investment in energy could help offset the decline.

``What other big industry is out there that can do a whole lot next year?'' Eck asks. He says a recession was here even before Iraq's Aug. 2 invasion of Kuwait.

``But the No. 1 thing we need is more availability of credit, lower interest rates. The credit crunch is the No. 1 problem.''

On the energy exploration side, there has been a net disinvestment for five years, in the form of dividends and stock buyouts. New investment could come through new stock financing, bond financing, or partnerships, he says. However, a change in the alternative minimum tax will make partnerships with independent oil companies less attractive. That means the major oil companies may end up financing a greater proportion of the drilling in the US than they used to. The trend of these companies investing more and more in exploration outside the US may reverse, Eck says.