The World Can Thank President Trump for the Oil Deal
By Merrill Matthews
In the midst of a pandemic, President Trump was able to convince the second and third largest crude oil producing countries to voluntarily cut production. In so doing he may have saved global financial markets, the U.S. energy industry -- and the U.S. economy.
Here's why.
Since the early 1970s the Organization of 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, 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 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.
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 fracking, the Great Recession that began in 2007 would have been longer and deeper.
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. The coronavirus pandemic has cut demand for oil by about 35 percent, and many workers are being furloughed or terminated.
Those job loses will hit energy-producing states especially hard.
In addition, many energy companies borrow money to finance their production efforts. If they can't repay their loans, that will squeeze 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.
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. If states were to impose such legislation, 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 politicians 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.
Merrill Matthews is a resident scholar with the Institute for Policy Innovation in Dallas, Texas. Follow him on Twitter @MerrillMatthews.
