US Republican lawmakers have singled out Saudi Arabia for their anger over the collapse in oil prices in the wake of the coronavirus pandemic, but the solution to the crisis lies much closer to home.
Last week almost 50 Republican members of Congress wrote to Saudi Arabia threatening to withdraw military and economic assistance from the Kingdom unless it agreed to rein in oil supply. Then on Saturday, a group of Republican senators, held a two-hour call with Saudi Arabia’s Energy Minister, Prince Abdulaziz bin Salman, and Deputy Defense Minister Prince Khaled bin Salman in which they lambasted the Kingdom for increasing its oil supply after the collapse of OPEC’s oil deal with Russia last month.
In a statement released after the call, Senator Kevin Cramer of North Dakota is quoted as saying: “The Saudis spent over a month waging war on American oil producers, all while our troops protected theirs. That’s not how friends treat friends. Their actions were inexcusable and won’t be forgotten. Saudi Arabia’s next steps will determine whether our strategic partnership is salvageable.”
Senator Dan Sullivan was quoted as saying: “The Kingdom needs to take sustainable, concrete actions to significantly cut oil production, and it needs to do so soon.”
This was a knee-jerk reaction to the crisis afflicting US oil-producing states, where widespread layoffs and production cuts have destroyed the viability of many state budgets and the livelihoods of millions of Americans.
High cost American oil companies are clearly the first to suffer from the price collapse, and it is predictable that many Republican lawmakers are under pressure from their lobby to find a scapegoat for falling prices. American oil understandably wants to make a profit.
But they would do better to look closer to home for a solution.
Saudi Arabia has been steadfast in its insistence that the crisis in oil markets is a global issue that must be addressed by truly global response. The global oil market has never witnessed a 20 percent fall in demand in the space of a month.
At a meeting last Thursday, Saudi Arabia, OPEC and allied producers including Russia all committed to reducing output by 23 percent. That is an unprecedented response. But OPEC represents only about one third of global oil production. It is patently absurd to think that OPEC, or indeed Saudi Arabia, can possibly balance the global market alone.
The largest oil producing countries that have yet to come close to that level of commitment are all in North America: Mexico, the United States and Canada. Mexico, in particular, has outright refused to sign on to its share of the deal, which has put OPEC’s plan in jeopardy.
US President Donald Trump has reportedly offered to make up the difference on behalf of Mexico, but it is still far from clear how much the United States, the largest oil producer in the world, is ready to contribute to the global cut.
If every significant oil producer in the world were to reduce their production by 20 percent, we would immediately avoid the gigantic oversupply in world oil markets and restore some balance.
The American oil industry has already closed down a significant volume of oil production because it is unprofitable at current prices, but this is not nearly enough. The US oil industry has the means to impose restrictions on oil producers through legal mechanisms at the state level that date back to the end of the 19th century. In Texas, the Railroad Commission which regulates 40 percent of the nation’s output, last used its powers to curb supply in 1973.
Given that the world is facing the worst economic crisis since the Great Depression, it would seem like a good time to dust off the rule book and put these powers to work for the good of the global industry and the millions of lives who depend on it.
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