By Don G. Briggs, President – LOGA (Louisiana Oil & Gas Association)

How far will the price of a barrel oil fall?

If you could design the perfect storm for the oil and gas industry you would forecast unprecedented low oil and gas prices, a worldwide recession and a capital credit crisis; unfortunately the “perfect storm” is at our door step.

For years OPEC “surplus oil capacity” averaged near 4 million to 5 million barrels per day, meaning OPEC could turn the valve to the left and put more oil into the world market if they chose to do so. Since 2002 OPEC’s “surplus oil capacity” has been gobbled up by increased world demand.

Record high oil prices caused consumers around the world to conserve and change their everyday use of gasoline, and as a result, world demand for oil declined; thus putting surplus oil into the market and increasing OPEC’s “surplus oil capacity.”

The price of a barrel of oil crashed downward. OPEC responded immediately by announcing 1.5 million barrels per day cut in production by simply closing the valve, hoping to stop the price freefall. The cut did not even slightly affect prices as they continued to fall.

Though it was the intention of the OPEC consortium to cut production by 1.5 million barrels per day, that goal has not been met. It appears some cheating has been going on among the members. They (OPEC) are now talking of cutting an additional 1.5 million to 2.5 million barrels to stop the landslide to $25 a barrel, which Merrill Lynch says could possibly happen before we see a recovery.

The oil and gas industry is a price-driven industry – high prices mean increased drilling and exploration, low prices mean stacked drilling rigs. No forecasters predicted prices to reach the lows they are today, much less freefalling to a possible $25 a barrel.

If a crash of $147 a barrel to $40 per barrel was not enough, throw in recession along with a capital credit crunch. It cannot get much worse than that, or can it? Oil and gas companies are reeling from the low crude prices and are adjusting their 2009 drilling budgets accordingly. As one CEO of a midsize oil and gas exploration company said to me, “We can adjust our budget to low oil prices, but when our capital lender called and said the $100 million line of credit for the 2009 drilling program they had committed to, now no longer exists, that brings us to our knees.”

Low oil prices, recession and a capital credit crisis are a triple whammy, a perfect storm or your worst nightmare if you are in the oil and gas industry.

We are in unprecedented waters and to what depth the recession, credit crisis and oil prices will go is not known. What is known, oil and gas exploration companies are currently reevaluating their drilling programs, cutting drilling budgets, and preparing for a turnaround that is somewhere in the future.

It will come back. But will it be in one year, five or somewhere in between? Rest assured, it will come back.