Amid calamity, whiff of change in oil patch

Loren Steffy says this time, unlike the ’80s bust, a flood of crude is colliding with lack of consumer demand.

Amid the economic devastation of lockdowns and layoffs, one welcome effect of the pandemic is spreading across some of America’s largest cities: fresh air.

With few people driving, pollution is subsiding, and many city dwellers are reconnecting with the simple wonder of breathing deeply.

For Houston’s oil industry, already facing mounting layoffs, budget cuts and big losses, it could be the smell of its own demise.

Last week, the price of West Texas Intermediate crude turned negative for the first time in history. Whether that’s a fluke or a harbinger of an era of unwanted oil — or both — is a matter of debate.

Unlike stocks, commodities can and do go negative, and Monday, the markets acted as they’re supposed to. But in this case, negative pricing for our national oil benchmark is a psychological shock — a reminder of the existential threat now facing Houston’s most important industry and the entire Texas economy.

Three things got the energy business into this mess: an abundance of cheap money that financed unprofitable drilling programs, a price war between Saudi Arabia and Russia, and, most significantly, the stay-at-home orders in the response to the COVD-19 pandemic.

As a result, global oil demand has fallen by about 30 percent in less than two months. The value of a barrel of West Texas crude, which started the year above $60 a barrel, now sells for less than a jumbo pack of toilet paper. Oil companies can’t make money at these prices, and some have already filed bankruptcy.

This isn’t like the 1980s when oil went bust because OPEC opened the taps. Back then, prices were low, but people were still driving and working. This time a flood of West Texas crude is colliding with the cold shoulder from consumers. The closest comparison may be the early 1930s, when oil fell to 13 cents a barrel and Gov. Ross Sterling sent the Texas Rangers into East Texas to shut down production.

But no one’s riding to the industry’s defense this time. Earlier this month, 20,000 people watched an online meeting of the Texas Railroad Commission — by itself is a sign of how desperate things are — after two of the biggest producers in the Permian Basin basically begged for help. They called for commissioners to exercise powers not used since 1972 to cut statewide production by 20 percent.

That’s about 1 million barrels of oil. Global output is more than 83 million barrels. By most accounts, a 20 percent cut in Texas would be less than one-twentieth of what the world needs to stabilize the markets. (The commission didn’t act, so the point is moot anyway.)

Ironically, the companies pleading for government help are known as “independents.” Oil markets have never been free, and companies that operate in them are dependent on governments foreign and domestic. COVID-19 and the price collapse have dispelled any lingering notion to the contrary.

Producers who for years overspent their cash flow — and called it success — while mocking renewables’ reliance on government support are now coming to the government hat in hand.

Economic crises tell us a lot about ourselves and about how our companies and markets operate. They cause us to re-examine familiar ways of doing things.

Some believe that because the current economic crisis stemmed from sudden government interference the recovery will be equally rapid. That’s unlikely.

We can’t wait to drive and shop and eat out and go to movies again, but hundreds of thousands of people have spent the past month realizing they can work from home. Some have found they prefer it to commuting. Some companies are liking it, too.

As people reassess their work and driving habits, they may eschew their old ways. The Houston Chronicle’s Andrew Dansby recently referred to this time as the Great Resetting.

Oil companies are resetting, too. Producers are racing to turn off the pumps in West Texas and, more significantly, in the Gulf of Mexico — another sign that companies expect a lengthy bust.

Meanwhile, as China comes out of lockdown, wind and solar power have gained market share other fuels’ expense. Renewables now account for 20 percent of China’s installed generation, up from 2 percent a decade ago, according to IHS Markit. Will other countries follow, and how will that effect post-pandemic demand?

Policy makers are taking notice. The Great Resetting may reduce carbon emissions globally by 4 percent, according to preliminary estimates. That won’t last, and even if it did, it wouldn’t avert the worst effects of climate change — the United Nations estimates we need to cut 7.6 percent for that — but it’s a big step. How many steps backwards will the public accept as we reset?

Economic need will demand some return to old habits in the short-term, but now that we have seen — and smelled — what’s possible, bigger changes may be coming. Public sentiment can drive markets, and much of the public had soured on fossil fuel even before the pandemic.

Houston, too, can reset. The City of Big Ideas is a hub of energy innovation, with small companies pioneering new business models for renewables and developing technology such as large-scale battery storage. Smart and talented people who lose their jobs at big oil companies will start new business, building on new ideas and launching new products. While oil will continue to play a vital role, the industry will likely be smaller, more government dependent and, increasingly, competing with alternative sources it once scorned.

Steffy is a former Chronicle business columnist and the author of three books about the oil business, including “George P. Mitchell: Fracking, Sustainability, and an Unorthodox Quest to Save the Planet.”