Limiting Texas’ oil and gas won’t stabilize the prices
Texas is the envy of the nation. A fair and predictable regulatory environment, no state income tax, plentiful natural resources, and millions of hard-working citizens, has created a strong economy with record job growth. If Texas was a nation, it would have the 10th largest economy in the world.
That was before COVID-19 and a poorly-timed feud between Saudi Arabia and Russia drove oil prices to all-time lows. Last week, futures contracts for the month of May dipped into negative pricing for the first time in history.
As chairman of the agency responsible for oil production in the state of Texas, I take this situation very seriously. I am very concerned about the thousands of Texans who have lost jobs during this downturn, and the thousands more at risk of unemployment in coming weeks.
One solution proposed to my agency, the Texas Railroad Commission, is to “prorate” or limit the production of crude oil in Texas. That proposal will be considered at the May 5 meeting. The Commission adopted “prorationing” in the late 1920s, but abandoned the practice after 1973.
To ensure we left no rock unturned, I quickly set up a virtual open meeting to discuss the advantages and disadvantages of proration. Roughly 30,000 people in 86 countries and 49 states watched the meeting, which lasted over 10 hours.
Over the last few weeks, I have thought long and hard over whether this is a direction Texas should take. A lot has changed since our state last prorated oil production. For example, in 1950, Texas controlled over 20 percent of the world’s oil supply, today we control roughly 5 percent. Given this, a government mandate cutting oil production twenty percent across the board would not have a significant impact on worldwide oil supply. Furthermore, industry is already reducing production on its own. By allowing the free market to work, producers can determine for themselves what level of production is economical.
Virtually every major trade association has come out against this policy from the Texas Oil and Gas Association, which represents small to large companies spanning every sector of the industry. The Texas Alliance of Energy Producers stated in its testimony against proration that a vast majority of its 2,600 members “employ 20 people or less.“Diamondback Energy credited the competitive free market in allowing it to grow from 10 to 700 employees since 2007, and said it would halt all drilling in Texas if the state implements proration.
During times of emergency, there is often pressure to “temporarily”
set aside your principles to solve a problem. As this pressure mounts, the cries of “we’ve got to do something” get louder and louder. But what if that solution is unlikely to solve the problem at all? Should a conservative state like Texas trade the free market for government central-planning in the oil patch?
Some critics, including one of the Democrats running for Railroad Commissioner, have called on our agency to make “bold decisions” such as proration in these tough times. But the truly bold decision in governance is to not give in to pressure and to say no. Implementing an antiquated policy simply because it exists is not bold. I refuse to do something just to say I took action, because taking the wrong action can actually make things worse.
Instead of simply going down the road of more government mandates, I established the Blue Ribbon Task Force for Oil Economic Recovery with every major trade association and the thousands of companies they represent. The task force will bring together government and industry to develop ideas, suggestions, and best practices to provide regulatory relief, keep businesses afloat, and save jobs. Rather than Texans listening to their government, Texas government officials will listen to Texans — the same Texans that made American energy dominance a reality.
Some have argued that further restricting or eliminating flaring would reduce oil production during these times, solving two problems at once. As the first commissioner in recent history to vote against a flaring permit, I have asked the task force to examine this issue to make future recommendations to the Commission that will both reduce flaring and maintain our status as a production powerhouse. Relief from the current demand crisis is my priority, and I want to make sure the issue of flaring is addressed separately from proration to ensure we don’t inadvertently harm struggling producers.
As soon as COVID-19 is behind us, demand for crude oil products, such as gasoline, will surely increase as Americans begin driving to work again. Things will stabilize. It is not a matter of if, but when.
This is not the first crisis our nation has faced, and it won’t be the last. But a 100 percent of the time we have faced hardship, America has come back stronger and so has Texas.
It is for this reason that I plan to stick to my free market principles and oppose proration in Texas.