In 1911, the US government broke up Standard Oil, because they recognized that one company controlling 90% of the market was not a free market.? Eight years later, the Texas Legislature recognized the potential for oil being produced in excess of market demand, they realized how harmful that could be to the industry and economy, and they outlawed it.? Texas law defines that as ?waste? and it charges the Railroad Commission of Texas (RRC) with preventing that waste.? Those laws are still on the books today.? They knew the ?free market? works, but they also recognized that government must take steps to protect that market from extraordinary circumstances.
In the wake of the largest oil market disruption in human history, there have been strong opinions regarding how best to respond.? AS the world went from producing and consuming around 100 million barrels per day (mbpd) to still producing 100mbpd but only consuming 70mbpd, it sent shockwaves through the markets the likes of which have never been seen (e.g. oil trading at a negative value).
Oil storage facilities are filling up everywhere.? Tankers full of oil are being parked off the coasts.? The RRC has received requests from multiple midstream companies to store oil in pipelines. Soon, there may be nowhere for US produced crudes to go.
In response to the demand destruction and the global oversupply, operators asked the RRC to restrain production to prolong the filling of storage. The hope was that demand would return before the entire Texas energy industry was wiped out from unprecedented low pricing and lack of infrastructure. ?As one of three statewide elected officials charged with leading the RRC, I believed it was important to take the request seriously and to determine the magnitude of waste occurring and what, if anything, the RRC might do to prevent it.
My mission has been to exercise the duties delegated under state law and ensure that the energy industry survives to keep Texas and the US energy strong.? I believed that Texas acting alone couldn?t do that which is why I have only advocated for Texas reductions if other states and nations participated.? No one acting alone can solve a 30mbpd global oversupply.? OPEC+ can?t do it alone, the G-20 can?t do it alone, the ?free market? can?t do it alone.? But if someone had led an international effort six weeks ago to slow down production, storage could have remained available and mass shut-ins in oil fields across Texas could have been avoided.? Now, it?s too late.
Has there been waste that the RRC is charged with preventing?? Absolutely.? One could start with the differential between Brent and WTI, net to producer.? That number has ranged between $5 and $15 in the past few weeks.? If we use an average of $10 per barrel, at 5 million barrels per day, there will have been $1.3 billion in waste over a 30-day span.? When you add in the ?non-COVID-19? value of that crude oil (say $50 per barrel), and the long-term destruction of oil production in the US, the jobs, and the future purchase of more barrels from overseas, the waste could easily exceed $100 billion. We should have analyzed that.
Instead, the discussion at the RRC devolved into a philosophical ?free market? discussion versus a fact-based, data-driven discussion.? I worked to focus on the data, follow the law, and quantify the reality of hundreds of thousands of Texas energy workers losing their jobs and businesses. Political groups, representing oil interests from all over the world worked to keep the debate from even happening.
The same ?free market? politicians arguing against proration want the federal government to turn Saudi oil tankers around.? And they want special loans for the oil industry.? And certain oil companies want the government to provide storage and waive rules and help keeping leases, and to stop paying royalties?..and on and on and on.? These are all requests for the government to intervene in the ?free market.? If everyone were intellectually honest they would admit government needs to act to save domestic energy production; the only question is which government and how should they act to best accomplish that goal.
Everyone says that businesses respond faster than government.? People are pointing to the wells around the country that are already being shut-in and saying, ?See, we didn?t need you to tell us to restrict production.? It?s true that this distorted market is working, and oil is shutting down.? In Mid-May or early June when storage is full and some companies are forced to shut in all of their wells while larger ones continue to operate, it will be a sad time in Texas history.
Most economists are now projecting that after our economy begins to run again, there will be an initial jump up in oil demand, before the market settles between 90 and 95mbpd of demand, 5 to 10mbpd less than pre COVID-19.? Supply will match that demand, and the world will cut production. But where will the supply reduction come from?? It looks like most of those losses will come from the United States.? Between the rapid decline of shale wells, the massive number of bankruptcies and layoffs, and lack of government support, our energy industry will struggle to compete with overseas national oil companies who are larger and have the backing of their governments.
Are we okay with the US oil industry being decimated while the rest of the world survives?? When oil prices go back up to $80 per barrel in three or four years, but much more of that money is going overseas, will we accept that it was just ?the free market?? If not, the question is, ?Why didn?t we do something??? Because we didn?t do the work, we won?t have an answer.
In short, I am not disappointed that we did not prorate.? I am disappointed that we didn?t do our job.