America’s free market ideals fade fast
Since Col. Edwin Drake discovered crude on Oil Creek in Titusville, Pennsylvania back in 1859, America’s oil and gas industry has lived by the “can do” spirit of exploration, capitalism and cut-throat competition.
After a month of losses and the steepest weekly drop since the Gulf War in 1991, the narrative emerging from America’s energy belt and on Capitol Hill is changing rapidly. In the face of potential recession and the coronavirus undermining oil demand by up to 10 million barrels a day, US lawmakers are pursuing what many can call a protectionist agenda.
In a span of a week, senators and congressmen have presented ideas ranging from an outright ban on oil imports from Saudi Arabia, Russia and OPEC countries to US producers accusing those same players of dumping crude on the American market.
The tone is strident and it begs the question, does the US energy sector want to live by free-market principles or does it prefer market intervention by the OPEC+ agreement? OPEC’s secretary general told me in November 2018 that since the so-called “Declaration of Cooperation” by Saudi Arabia, Russia and 22 other countries, US producers, especially those in the shale industry, have benefited the most.
“If you look at the job creation in the basins, you will appreciate what OPEC and non-OPEC have jointly done to benefit the United States,” Mohammed Barkindo said.
There are one and half million jobs in oil and gas production with an estimated ten times that amount indirectly linked to a full range of services supporting the industry, from auto dealers to restaurants. During a visit to Odessa, Texas last October in the heart of the Permian Basin, I witnessed first-hand the boom town atmosphere, with oil workers voicing complaints about housing shortages due to rapid growth and new pick-up trucks rolling off sales lots in record numbers.
America had moved to the top of global rankings with nearly 13 million barrels a day of production, topping Russia at about 11 and a half million and once-constrained Saudi Arabia keeping output below 10 million.
It certainly appears then that Saudi Arabia’s new strategy may be having the desired effect. The US is reaching out to Riyadh (not the other way around) and the energy regulator in Texas opened talks with OPEC’s secretary general, suggesting that individual states need to be part of the solution.
Today all bets are off after a nasty spat at the OPEC meeting in Vienna led to full blown price war. The two largest exporters, Saudi Arabia and Russia, are vying for market share and US producers are caught in the crossfire.
Saudi Arabia has pledged to produce at least 12.3 million barrels over the “coming months”, while discounting prices and Russia said from April 1 all producers will decide for themselves what the market can handle.
US Energy Secretary Dan Brouillette called those actions “intentional disruption to world oil markets by foreign actors.”
Thirteen US senators from oil producing states are crying foul and wrote directly to Saudi Arabia’s Crown Prince Mohammed bin Salman asking him to rethink his strategy. Many of the same lawmakers called on US President Donald Trump to get off the sidelines and act.
“We have a lot of power over the situation, and we’re trying to find some kind of medium ground,” Trump told journalists last week. The verbal intervention helped lift prices for a day but the benchmark US crude tumbled 29 percent on the week.
This puts the US president in a difficult bind.
If he supports a move toward market management by Saudi Arabia and others, he could be seen to be endorsing what Americans have defined as a cartel, which is illegal under federal law. Doing nothing risks alienating his voter base in the country’s energy states.
Trump’s initial gambits include dispatching an energy envoy to the Kingdom for several months and to purchase up to $3 billion of crude to fill the US strategic petroleum reserve and in turn support local producers.
It certainly appears then that Saudi Arabia’s new strategy may be having the desired effect. The US is reaching out to Riyadh (not the other way around) and the energy regulator in Texas opened talks with OPEC’s secretary general, suggesting that individual states need to be part of the solution. In North Dakota, regulators are weighing plans to deactivate wells, encouraging producers to keep oil offline.
It was William Shakespeare who said, “desperate times breed desperate measures.” There is more than a hint of that after what has been historic plunge in prices and the coronavirus that is eating away at demand.
• John Defterios is CNN Business Emerging Markets Editor and host of The Global Energy Challenge on CNN International.