The US should avoid repeating past mistakes
North America's storied oil history highlights lessons that need to be learned in the current economic crisis
There remains a strong folk memory in Texas oil country of the 1930s, when a possible price crash into single figures did not mean dollars, but cents.
And that may have been on the mind of Ryan Sitton, a Republican Texas railroad commissioner, when he tweeted in late March, “Just got off the phone with Opec secretary-general Barkindo... We all agree an international deal must get done to ensure economic stability as we recover from Covid-19. He was kind enough to invite me to the next Opec meeting in June.”
Back in the 1930s, the rush to produce from small licences in the giant East Texas oilfield combined with a demand collapse to plunge prices to 13¢/bl. Gas stations were reduced to offering inducements such as free chicken to try to lure in customers.
We face an abundance of fossil fuels in an era of falling demand and limited carbon budgets
In response, the state government called in the National Guard to enforce production rationing, administered by a newly formed body, the Texas Railroad Commission (TRC). But, under a banner of reducing waste, the TRC’s system actually encouraged it. Like any cartelised quota system, the TRC limited production from large, cheap wells and helped expensive ones.
Pro-rationing and production quota enforcement eventually failed, due to cheating. But not before it caught the eye of Venezuela—and, in effect, the TRC’s quotas became the blueprint for the current Opec production mandate system.
With its prolific Permian region producing at over 5mn bl/d, the Texas onshore is once again center of the US oil industry. And, just as with the Great Depression of 1929, we are facing unprecedented demand destruction due to Covid-19. The parallels with 90 years ago are uncanny.
Estimates of present demand destruction point to 10-20pc in the short run, which may translate to 5pc for the whole year, based on the assumption that the pandemic can be largely resolved within six months. In many ways, any supply-side adjustment risks being merely a sideshow in the face of such massive demand loss. Even if a new Opec+ 1.5mn bl/d production cut was agreed, it would be a drop in the ocean in terms of price recovery.
Attempts by some US politicians to invoke the old TRC monopoly, impose quotas and limit production—in order to try to save the industry and jobs—is understandable, but flawed. To revert to this relic of a bygone area and to cooperate with Opec, an international cartel, is not only wrong, but doomed to fail.
We face an abundance of fossil fuels in an era of falling demand and limited carbon budgets. Artificially supporting prices using archaic cartel arrangements will only speed their demise. Covid-19 will be, in relative terms, a short-term impact—demand and prices will rebound. But the current crisis is a glimpse of things to come: an abundance of oil in a market that will need it less and less.
Adi Imsirovic is research associate at the Oxford Institute for Energy Studies