Oil prices surged Wednesday after OPEC agreed to reduce crude production for the first time since 2008, but experts say it's too soon for Louisiana's battered energy sector to breathe a collective sigh of relief.
Many viewed the pact, which cuts 1.2 million barrels a day, as larger than expected, but that still leaves OPEC's daily output at 32.5 million barrels. Russia, another major oil-producing country that is not part of OPEC, also agreed to the cutback, which is effective for six months beginning Jan. 1, with a possibility of renewal.
"This is clearly significant, more than what I think the market was expecting," said David Dismukes, director of the LSU Center for Energy Studies.
The markets responded by sending West Texas Intermediate crude, the U.S. benchmark, up $4.21, or 9.3 percent, to close at $49.44 a barrel in New York. Brent crude, the international benchmark followed by many refineries, gained $4.09, or 8.8 percent, to $50.47 a barrel in London.
Even after Wednesday's gains, the price is too low to help Louisiana and its energy industry, said retired LSU economist Loren Scott.
"The break-even point, not make profit, just the break-even point in the Gulf of Mexico, generally speaking, is $55 to $60 a barrel," Scott said. "So we really need those prices to get up higher than this."
The U.S. is expected to average about 8.8 million barrels per day of production this year and 8.7 million barrels per day in 2017, the U.S. Energy Information Administration reported Nov. 8. That's down from 2015 when U.S. production averaged 9.4 million barrels per day, the highest levels in decades.
"It's more hope after this, but it's nowhere near the number you need to really make people turn the switch back on," Peter Ricchiuti, a finance professor at Tulane University, said of the OPEC reduction and price gains.
One of two things will have to happen for Louisiana's energy industry to recover, Scott said. The price of oil will have to reach $60 a barrel, or the companies that operate in the Gulf will have to get service companies to cut fees enough to lower the break-even point for production.
Of course, if drilling activity picks up elsewhere in the U.S., some Louisiana-based oilfield service companies that work there could see an uptick in business.
Already, the U.S. rig count has climbed recently. There were 593 rigs exploring for oil and natural gas in the U.S. last week, having bottomed out in May at 404. Still, the 593 is down from 744 a year ago, according to Houston oilfield services company Baker Hughes Inc.
Some industry officials, including Gifford Briggs, vice president of the Louisiana Oil and Gas Association, expressed guarded optimism Wednesday, noting that just because OPEC members agreed to cut production doesn't mean they will.
Still, the cartel members have to do something to boost prices.
"Their economies are getting hammered, you know. So they've got to do something. Venezuela's on the verge of complete and total collapse," Briggs said. "I think that's certainly the main genesis for what we're seeing here."
In the longer run, experts say it's highly unlikely that oil prices will return to the heady days of around $100 a barrel of two years ago.
Over the coming weeks and months, many experts will be watching how the industry responds if oil prices begin recovering.
The problem for OPEC is that the agreement doesn't apply to U.S. energy companies, Briggs said. They could easily replace the OPEC production.
"If it gets to $60, I guarantee you there's going to be a lot more production in the U.S.," he said.
Any potential uptick in deepwater Gulf of Mexico production is likely years off, he added. Before producers invest hundreds of millions of dollars in a deepwater project, they must be convinced that the prices will remain high enough to justify that kind of investment.
But in the short term, areas like the Permian Basin in Texas — where several thousand wells are drilled but not completed — could benefit from a modest price increase, experts say.
"We may get up to $60, but I think this is going to keep things at best in the $50-range," Dismukes said. "It's really going to depend on how quickly we get a production response to this in the U.S."