In the midst of a pandemic, President Donald Trump pulled off an energy coup: He was able to convince the second and third largest crude oil producing countries to set their bickering aside and voluntarily cut production, at least for a couple of months. In so doing Trump may have saved global financial markets, the U.S. energy industry—and the U.S. economy.
Since Monday morning, U.S. oil prices have dropped significantly, in large part because of decreased demand and storage issues. But that doesn’t change the larger point: President Trump's oil deal may have bought the industry a little time—and only time will tell if it's enough.
Even the New York Times, no friend of Trump or fossil fuels, conceded he “prodded” the oil nations to “reach a deal.”
Since the early 1970s the Organization of the Petroleum Exporting Countries (OPEC), which is dominated by Saudi Arabia, has been the prime mover in world oil markets.
Russia, which for years was the second largest crude oil producer after the Saudis, has never been a formal member of OPEC. It’s played more of an observer role, but usually went along with OPEC actions. Usually, but not always.
This recent disagreement was a big one. The Saudis pushed for production cuts, but the Russians refused. In response, the Saudis said they would ramp up their production by some 3 million barrels per day, an action that tanked already depressed oil prices.
Since both countries depend heavily on oil revenue, the wounds were self-inflicted. But there has also been collateral damage: The United States.
Fifteen years ago, U.S. consumers might have cheered the rift—and the low gasoline prices. No more.
The United States has become the world’s largest crude oil and natural gas producer. Thanks to the fracking boom, oil production increased from about 5 million barrels a day in the mid-2000s to more than 13 million barrels a day last January.
Oil and natural gas production are major drivers of the U.S. economy. Without the fracking boom, the Great Recession that began in 2007 would have been longer and deeper. The energy industry was one of the few industries that thrived, putting the country back on its feet.
But U.S. oil and gas production come from private energy companies, not the government. If the companies get soaked, we all get wet.
For example, the energy industry supports more than 10 million U.S. jobs, including lots of highly paid, blue-collar workers. The coronavirus pandemic could reduce demand for oil by 50 percent, and many of those workers are being furloughed or terminated.
Those job loses will hit the energy-producing states especially hard.
In addition, many energy companies borrow money to finance their production efforts—just like companies in most other industries. If they can’t repay their loans, that will squeeze the banks and other lenders.
Plus lots of investors and pensions own energy company stocks. When the stock price sinks, those investors may get margin calls, forcing them to sell other assets—perhaps at rock bottom prices.
In other words, there are lots of downstream ripple effects from a global oil-price implosion.
Which is why it was important for Trump to get the Saudis and Russians back to the table. We don’t know all of the details, but the man who has long touted his deal-making ability pulled it off.
And here’s another important result: The deal relaxes some of the pressure on states and the federal government to take action.
Some have been calling on states to arbitrarily cap how much private sector oil companies can produce. While the intentions may have been good, pushing the government down this road is a terrible idea.
If states were to impose such legislation or executive orders, that could set a bad precedent—especially in blue states that want to curtail or eliminate fossil fuel production. They might set a production cap so low that energy companies would feel compelled to abandon their operations in that state.
The last thing we need is for politicians to get their foot in the oil industry’s C-Suite doors, determining how much a company can or cannot produce.
Yes, the COVID-19 pandemic will likely shutter many oil and gas producing companies—especially smaller and over-leveraged ones. That’s bad news, but their assets will likely be bought by financially stronger companies.
As states begin a phased-in process of heading back to work, people will need gasoline. Excess supplies could be used up fairly soon, allowing the energy companies to begin ramping up production once again.
The U.S. energy industry won’t recover overnight, but the Saudi-Russian deal, brokered by Trump, may mean we will still have an energy industry to revive.