Forgive us if you will, but in talking about oil in Texas today we’ll start with one aspect of the industry that we suspect many would like to do away with or just pretend doesn’t exist. Energy remains a business where the animal spirits of the economy are never far off. Prospecting for profits in rocks far below the surface requires taking financial risks, driving innovation to outcompete other firms and, yes, it even involves risking financial ruin for individuals and companies as they make bets about what they’ll be able to make of the energy they pull from the ground.
This is all top of mind because the energy industry across the globe and here in Texas is facing a reckoning. In case you haven’t realized it because you haven’t filled up your SUV recently, oil prices are scraping the bottom of the barrel. We’re in the midst of an oil glut as Russian and Saudi wells had flooded the markets just as economies were about to be shuttered across the world in response to the coronavirus pandemic. As demand fell and supplies increased, the bottom fell out of the oil business.
How far did it fall? In January, West Texas Intermediate oil fetched $60 a barrel on the world’s market. Last week, the price dropped below $20 a barrel. Prices in regional oil patches are even lower.
No one expects you to cry for the oil and gas industry, but it’s nonetheless true that prices in that range will be ruinous for more than just the irresponsible risk-takers. In fact, even players with strong balance sheets are noting that it might put a dent into the oil and gas business that could take a generation to work out.
How so? The oil and gas business is a massively complicated industry, but in broad strokes there is a dynamism among American producers that has often driven innovation. Unlike, say, Saudi Arabia, there isn’t a massive, government-sponsored energy company that both dominates production and uses its profits to underwrite the workings of the country’s national affairs. We don’t quite have a pure free-market oil business in the U.S. as the oil and gas business has always been regulated by various levels of government, but we have a free enough system to empower anyone with a good idea who can raise capital to spur innovation.
Now we have a unique set of circumstances that has crashed the system and could wipe out both weaker firms and firms that would otherwise be strong enough to thrive. These circumstances involve, first, two monopolistic players who decided to wage a price war, followed by a global pandemic that has stopped the free functioning of economies far and wide.
To carry the industry through this calamity some — including Pioneer Natural Resources — are pressing the Texas Railroad Commission to curb production. The commission’s power to impose such restrictions dates back to the 1930s, though it hasn’t exercised that power since the 1970s. The aim is similar to the thinking behind the production curbs worked out globally over the past week — curbs that involved OPEC and other producers cutting back as the Russians and Saudis stand down from their price war. Not incidentally, the curbs were agreed to after President Donald Trump stepped in to win the support of Mexico and pledged to take up some of the cuts our southern neighbor was being asked to agree to.
Some producers hope the Railroad Commission of Texas will implement curbs and that will spark other states to do likewise and thereby temporarily drive down oil production in a way that is more evenly distributed than simply allowing prices to spur producers to cut back production, and that is also significant enough to buoy prices. Pioneer has suggested a 10% production cut across the board in Texas.
The three elected Railroad Commissioners, Wayne Christian, Ryan Sitton and Christi Craddick, are free-market conservatives. And they met last week to hear from dozens of industry insiders on what to do. It’s anyone’s guess whether they’ll want to act to ensure there is more competition on the other side of this crisis, and if so, if they will choose to use the heavy hammer bequeathed to them from a different era to force production cuts, or if they settle on more subtle rule changes to rein in the industry.
Our view is that innovation like fracking has changed the world by giving the United States the upper hand in energy markets. That puts the Russians and others back on their heels. It also empowers and frees the American consumer. It would be wise for the commissioners to focus on ensuring that there is a robust and competitive industry after COVID-19 recedes into the deeper recesses of public concerns, and to show the world what firm, fair oil regulation looks like in a competitive market.
There are a lot of ways to do that. One, of course, is to be mindful of setting precedents that can lead to long-term regulations no one now intends. So if the commission imposes blanket curbs now, it needs to be careful in its justifications. A future commission could expand on what’s done now, so this commission should be clear in explaining its decisions were based on short-term and extraordinary conditions.
The commission has other options, too, of course. It could offer regulations to the way the market functions designed to protect the industry from irreversible damage during a crisis. Well-functioning markets operate within sets of rules that allow prices, innovation, and value-creation to drive outcomes, and it could be that the Texas oil industry needs some well-crafted regulations to ensure the oil market here works that way. For example, the Railroad Commission could move against “flaring,” the practice of burning off natural gas that’s a byproduct oil production, and it must be flared in areas that lack the pipeline infrastructure to carry the natural gas to market. Reducing flaring can also curb the associated oil production, albeit in a less evenly distributed way than an across-the-board cut.
Whatever it decides, we’d hope that the commission prioritizes preserving a dynamic and competitive industry rather than allowing this market shock to significantly hamper the Texas oil industry or even prompt large survivors to move their investment elsewhere in the world. After this is over, we’d like to see the industry’s animal spirits alive and well and running free.
———
©2020 The Dallas Morning News
Visit The Dallas Morning News at www.dallasnews.com
Distributed by Tribune Content Agency, LLC.