Should the US bail out shale producers?
It was a sight on computer trading charts not witnessed before, a $50 swing in oil prices from top to bottom in the span of a week, after the US benchmark crude crashed into negative territory for the first time ever. 24 hours later, US President Donald Trump took to Twitter to say he wanted his team to formulate a plan to make funds available for America’s energy patch. “We will never let the great US oil & gas industry down,” the president declared.
Options on the table include access to liquidity to outright bans on imports from OPEC+ nations.
At this juncture, US Energy Secretary Dan Brouilette is weighing the option of securing loans of up to $250 million per company to stave off bankruptcies for small and mid-sized producers.
The Trump administration is eager to tap into an existing $600 billion emergency fund set up by the US Federal Reserve to buffer the downturn due to the coronavirus pandemic. That policy is supported by the head of the biggest oil and gas lobbying organization, the American Petroleum Institute. CEO Mike
Sommers told CNN in an interview that the industry group wants to ensure “our companies have access to the liquidity that they need to survive the crisis.”
The sector is on the cusp of a massive shake out, according to Rystad Energy. In a world of $20 oil, where prices are now, over 500 exploration and production companies will file for bankruptcy protection by the end of next year. Cut oil prices in half to $10 and that number would double according to the energy consultancy.
Which begs the question: In a country that prides itself on free market principles, is it right to bail out those who are buried under a mountain of debt and cannot make money under $35-$40 a barrel? During the decade-long shale expansion, US production ballooned to nearly 13 million barrels a day, but the wildcat exploration companies who drove this boom did so in the name of market share not pure profit. They are now sitting on an estimated debt pile of $200 billion and need higher prices, and therefore implicit support from the OPEC+ alliance of 23 producers.
When oil prices rose above $70 barrel, Trump would take to social media to suggest OPEC was being greedy; below $20, he demanded an end to the price war.
It’s clear that what I like to call a “Goldilocks price,” something that is not too hot nor too cold and one that would provide price stability for investment, was the motivation behind the creation of the OPEC+ Declaration of Cooperation in late 2017. Many in the energy industry go as far as to suggest oil and gas bailouts would create a moral hazard, if US taxpayer money is used to fund a business model that is no longer viable in a lower price environment. This is, however, where presidential election year politics come to the fore. Nationwide studies in the US show that the oil and gas industry is responsible for 1.5 million direct jobs and about 10 times that amount in related services from barbecue houses to real estate groups and all businesses in between. The energy states — Texas, Oklahoma, Louisiana, New Mexico and North Dakota — are important to Trump in November, so he is eager to act now.
There is a fine line for the president to walk. A bailout for what is often referred to as “big oil” would not sit well with those outside of his loyal voting base. He still needs broader support in the swing states to secure reelection. Democratic lawmakers are already pushing back and are against using existing pandemic relief funding for the energy sector. Senator Edward Markey and Congresswoman Nanette Diaz Barragan have written to the Federal Reserve wanting to block access.
Those lawmakers and others in Washington talk of a systemic change in the US energy landscape due to the beginning of the energy transition to solar, wind and other renewable fuels being developed.
Then there is the “nuclear option” being touted by Republican lawmakers from energy states. Senator Kevin Cramer from North Dakota is calling on Trump to form a blockade against imports of foreign oil. During the record collapse of prices on April 20, Trump said since we have plenty of oil, he would “take a look at that.”
In the next couple of weeks, the focus will be on a financial bailout. Due to the pandemic, which has knocked demand down by nearly a third, there is a global abundance of oil, so much that it looks like US industry should be trimmed down by market forces despite efforts to the contrary.