Unthinkable becomes thinkable as US shale industry ponders production cuts

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C: Amy Youngs

The unthinkable could soon be thinkable. For years, emboldened by a brazenly pro-Big Oil President, the US shale industry has drilled and fracked, oblivious to the climate crisis, local communities, or whether they’re even generating value.

But as the global public health emergency worsens – Covid-19 – it appears to be reshaping energy policy in a way that was unthinkable just a few weeks ago. As travel and commercial activity slowed, oil demand has plummeted, and so has the oil price. The ensuing price war between Saudi Arabia and Russia has created the perfect storm for the already fragile US oil industry.

But what if the free market extremists that operate America’s poorly regulated oil and gas industry cooperate with Saudi Arabia and Russia to rein in production and stabilize oil prices? Enter Ryan Sitton, outgoing commissioner from the Texas Railroad Commission, which regulates oil and gas production in the state. Texas has become the world’s third-largest oil producer due to the fracking revolution. Sitton is a Republican Party activist who ran for re-election on a platform of opposing “socialism and climate-change myths.”

But in an oped for Bloomberg at the end of last week, Sitton suggested that Texan free market ideology may have to yield to the more command and control tendencies of its oil market rivals. He predicted that a “surplus of oil as high as 1.5 billion barrels could be hitting the market in the coming months,” which could drive “oil prices to their lowest ever and force companies to shut down production and cut off necessary cash flow to remain in operation.”

He then proposed what to many in the industry and many in the Trump Administration would be totally unthinkable: to limit production.

This would be a dramatic step and one not seen since the oil crisis of 1973.  He wrote: In theory, Texas could cut production by 10%, and if Saudi Arabia is willing to cut production by 10% from its pre-pandemic levels and Russia is willing to do the same, it would return the market to pre-crisis levels (and only somewhat oversupplied) … Perhaps it is time for the world leader in energy markets to once again be the United States.”

His intervention came after it was reported that two of the biggest shale producers in Texas, Parsley Energy and Pioneer Natural Resources, had asked the Railroad commission to intervene.

To do nothing would “absolutely decimate the American oil and gas industry,” said Matt Gallagher, chief executive of Parsley Energy. “We’re looking for stabilization to keep American workers employed as much as possible.”

For the industry, something has to happen fast. The leading players in the Texas shale industry, including Exxon and Pioneer Natural Resources, have cut at least $7.6 billion from their combined 2020 capital expenditure budgets. More companies are expected to follow suit and cut budgets and lay-off staff.

And on Friday, it was reported by the Wall Street Journal that Sitton was one of the “U.S. oil industry regulators” who are “set to open a dialogue with OPEC in talks that could help foster a truce” in the oil price war.

Although Sitton was said to have been invited to attend OPEC’s next general meeting in June, reports from this morning say a deal between the Texans and Saudi Arabia is fading. Sitton’s proposal was apparently too much for the free market extremists at the American Petroleum Institute (API).

The lobby group’s Senior Vice President, Frank Macchiarola, called the proposal “shortsighted” and “anti-competitive” which would will “harm U.S. consumers and American businesses.”

As usual the API has only one message: drill, baby, drill. No matter what the oil price is. No matter what the social and climate cost is.

If the API gets its way, and it usually does when it comes to regulating the US oil industry, the oil market will hit a storage wall in the month or so. All available storage will fill and when that happens, prices could go negative. Hundreds of companies will likely go bust and workers laid off.

The oil industry playbook will mean the top executives will navigate bankruptcy filings and keep their lavish salaries. As we have already seen, companies will look to government for the kind of “socialism” they can live with: the kind that uses public money to bail them out of the hole.

We cannot let this happen. We must push for the current situation to not be a repeat of 2009’s disaster capitalism. We must end the privatization of gains and the socialization of losses. We need more than the temporary production cuts Sitton has suggested and the API has balked at.

If we are going to support workers, minimize economic disruption, and manage the decline of an industry destroying the climate our lives and economy depend on, it may be time to do the unthinkable. Nationalize the oil industry, control production, and channel the profits into the just transition we so sorely need. We need a true energy democracy. We need it now.