Oil production cuts by OPEC and other countries have helped calm the market, but the US needs more oil supplies
Even in the best of times, the energy industry is constantly plagued by price fluctuations. However, in my 45 years in the oil and gas business, I have never seen the confluence of unfavorable market factors we see today. The COVID-19 pandemic posed a serious health threat and destroyed global energy demand, which was subsequently exacerbated by a market share battle between Saudi Arabia and Russia.
For U.S. energy producers caught in the crossfire, last week's efforts by the Organization of the Petroleum Exporting Countries and Group of 20 members to forge a global solution to production curbs offer optimism for a soft landing. But further cuts are needed, and if the U.S. commits concretely to production cuts, other G20 countries may also take action.
The G20 countries correctly recognize the seriousness of the oil market collapse and its potential impact. Oil prices remain under pressure as demand losses due to the coronavirus pandemic are nearly three times as large as the 9.7 million barrels per day production cut by OPEC and others. Global storage level is nearing capacity. Oil inventories remain on track to triple their record high. On Thursday, West Texas crude oil prices fell 9.3% in the face of possible production cuts. Within the past two weeks, oil prices have fallen to $10 per barrel in the Midland Basin and $3 per barrel in the Delaware Basin.
Based on publicly available financial data, only about 10 of the 74 independent publicly traded U.S. oil and gas companies have balance sheets strong enough to weather market turmoil. The sharp rise in unemployment (more than 300,000 new jobless claims in Texas last week alone) is a sign of imminent risk to millions of American jobs supported by the oil and gas industry. It shows that there is.
In normal times, the weeding out of weaker companies in an industry would be an expected and even healthy outcome of a downcycle. But the current market collapse is far from ordinary in its origins and impact, and the prolonged low oil price crisis threatens U.S. national interests.
The United States has transformed from being the largest importer of energy resources to a net exporter, a game-changer for our national security and foreign policy interests. The threat of reversing this change is of greatest concern. The United States relied on imports from the Middle East for 60% of its crude oil needs, with prices exceeding $100 per barrel.
Supply restraints are essential to prevent serious and long-term damage to the U.S. energy ecosystem and broader manufacturing base until the global economic engine can safely restart. I commend the Trump administration and members of Congress for proactively engaging with foreign leaders on the global oil glut. But if the United States encourages other countries to remove unnecessary oil from the market, why can't we expect the same?
As one of the nation's largest independent oil producers, my company, Pioneer Natural Resources, is asking the Texas Railroad Commission to join these efforts and shift the burden of curtailment to all Texas producers. called for the adoption of interim measures to ensure a predictable and even distribution of otherwise it will occur. Such restraint would complement other actions around the world to stabilize oil prices. A carefully constructed proportionate allocation is only justified in the extraordinary circumstances currently facing the nation, and would yield some very positive results.
First, aggressive state action would forestall a request for a federal bailout of the energy sector that Pioneer neither asked for nor wanted. Some of America's largest oil producers oppose state action to cut supply, citing the preservation of free markets. The oil market has not been “free” for decades, as supply control by OPEC has become the norm. It would be foolish to dismiss state-mandated cuts as interference with the free market. Many of those companies have praised President Donald Trump's efforts to encourage other countries to cut production and are calling for low-cost federal funding for the industry. These positions are in conflict.
Second, temporary prorations would provide a framework within which oil producers could implement more orderly and fair cuts. Innovative independent producers have been at the forefront of America's energy revolution. If there is room for adjustment, they will lead the future revival of the industry.
Third, Texas, which accounts for 40% of U.S. oil production, is uniquely positioned to send the right signals to G20 countries to support the president's diplomatic efforts. The federal government can only act to reduce production on federal lands. Therefore, Texas and other U.S. states have an obligation to take leadership in implementing their own temporary reduction programs.
Decisions made today about managing the impact of the COVID-19 pandemic on our nation's economy will have repercussions for decades. Among many challenges, choosing between disparate paths for the future of energy is difficult. The United States needs to participate in multilateral efforts to align oil supplies with global demand and available transportation and storage capacity. Success will depend on the judicious use of state regulatory authority to this end.
From my point of view, doing nothing is the wrong path. Texas leaders should seize the opportunity to protect industries important to our state and nation.
Scott Sheffield is the CEO of Pioneer Natural Resources. He wrote this column for the Dallas Morning News.
