The inspiration for OPEC came in another great economic crisis. In 1930, amid the Great Depression and a flood of oil from the giant new East Texas field, prices dropped to 10 cents per barrel, and the Texas Railroad Commission took the decision to limit production, at the muzzle of a gun if necessary. Now these two venerable institutions may be ready to act again, to ease the worst oil glut in history. Does “OPEC++” or TROPEC (Texas-Russia-OPEC) have a chance of becoming reality?
Over the past week, American producers, who added almost 5.5 million barrels per day to world oil supplies over the past three years, have complained about the collapse of the OPEC+ pact between OPEC, Russia and some other non-OPEC producers. The decision to launch a price war in the face of the slump in demand caused by the coronavirus drove prices down from $50 just before the failed OPEC meeting in Vienna, to a 17-year low of $25 per barrel.
“Irresponsible”, said an editorial in the US’s popular industry magazine World Oil, blaming the price crash on “the predatory oil dumping actions of Russia and Saudi Arabia”. Some fear that without action, prices could bottom in the single digits as storage fills up, before gradually recovering as high-cost producers are driven out of business and some countries get a grip on the virus crisis.
With annual decline rates of more than 20 percent, and costs just for operating existing wells of $27-37 per barrel, US shale will suffer first. This would undermine the country’s narrative of “energy dominance”, where oil and gas exports were supposed to be a key pillar of its geopolitical primacy over adversaries such as Russia and Iran.
Senator Kevin Cramer from oil-producing North Dakota called for an embargo on US crude imports from Russia, Saudi Arabia, and even other OPEC countries such as Iraq which have not increased production. This is infeasible, because while shale oil is mostly very light, US refiners require medium-heavy grades to blend into their feedstock. With Venezuelan oil ruled out by sanctions, they need Gulf and Russian crude.
Donald Trump has said, “We have a lot of power over the situation… At the appropriate time I’ll get involved.” In line with his usual habits, instead of an outright ban, the US could impose tariffs or quotas on imports, that would harm selected countries and push yet more oil onto a saturated market in the rest of the world. Shale magnate Harold Hamm, chairman of Continental Resources and a confidant of the president’s, has called for such measures. Of course, Saudi Arabia is clearly not “dumping” oil – its production costs are far below $25 per barrel, even allowing for the hefty discounts it currently offers customers – but logic is in short supply at such a time.
But there is another way: possible cooperation. The oddly-named Texas Railroad Commission (TRC) regulates oil in the US’s largest producing state. If Texas were an independent country, as some Texans believe it is, it would be the fourth-largest producer in the world. Until 1972, the TRC limited production to stabilise prices, making the state the equivalent of Saudi Arabia today, the safety valve for the world oil market. TRC staff believe it would be legally possible to do this again.
Ryan Sitton, one of the TRC’s three commissioners, has written in a Bloomberg op-ed that Texas, Saudi Arabia and Russia could all cut production by 10 percent. The state produced 5.35 million bpd in December. Scott Sheffield, chief executive of Pioneer Natural Resources, a large shale oil firm, has spoken to the Texas governor about offering such production restrictions in negotiations with Riyadh and Moscow. But to avoid anti-trust legislation, the federal government would presumably have to coordinate such action, using national security justification if necessary.
The TRC alone only regulates Texan production. Lawyers will be poring over statute books to see whether other state regulators, the Federal Energy Regulatory Commission (which oversees inter-state commerce), or other authorities would be required to widen the scope.
The suggestions of cooperation drove oil prices up 24 percent on Thursday. Such a move would not be totally unprecedented. In December 2018, faced with limited pipeline export capacity, the Canadian province of Alberta mandated an 8.7 percent cut in production, now extended to the end of this year, which successfully reduced discounts for Albertan crude.
After a ban in 1975, the US only permitted exporting oil again in January 2016 under president Obama. But without also limiting production, a restriction on exports just drives down domestic prices and further hurts producers.
Cooperation would be intensely controversial. Pushing pump prices up again would end one small benefit for the struggling US consumer. It would bolster Donald Trump’s support in oil-producing states that are usually solidly Republican anyway, but could harm him in key mid-west swing states.
Russia, which exited the pact on concerns it had already given away too much to shale companies, has shown signs of relenting in recent days as the economic damage takes hold. US involvement might be the face-saving element to bring Riyadh and Moscow back together. But the Kremlin would still likely want some concessions in return – such as an end to American sanctions on its petroleum sector.
TROPEC may be a possibility, but keeping it together would be a formidable task. Still, some short-term tactical cooperation might prevent the very worst for the oil sector. If US domestic politics align to make this a possibility, Saudi Arabia and Russia should welcome a temporary member to their club.