Economic Crisis Is No Reason To Push Bad Policy On The Oil Sector

The growing Covid-19 crisis is going to have a significant impact across every sector of the economy, including the oil sector. Government officials shouldn’t use a crisis to promote bad policy ideas, though. 

That is what’s happening in Texas where Ryan Sitton, one of three members of the Railroad Commission of Texas, which regulates the state’s oil industry, has called for Texas to impose production limits, a drastic move that hasn’t been employed since 1973.

The Commission appears to be taking the possibility of ordering oil production cuts seriously. Commissioner Sitton has even been invited to address OPEC at its June meeting in Vienna. 

Why cut Texas oil production? Sitton is concerned, as many are, about Russia’s decision to break ties with Saudi Arabia and that country’s decision to maximize its own oil output. Saudi Arabia’s move has sent oil prices into a nosedive, recently reaching their lowest level since the 1991 Gulf War. 

Sitton isn’t the only one hitting the panic button about oil prices. In Washington, D.C., Senators Jim Inhofe of Oklahoma and Roger Wicker of Mississippi are leading a push to impose new tariffs on Saudi oil imports.

To be sure, oil prices in the $20 range are bad news for domestic producers. But no one wins if we limit American oil production or plunge ourselves into a price war. The better solution? Stay the course and trust in America’s vast supplies to dominate the market. 

The United States is now the world’s largest oil producer, responsible for about 40 percent of global oil production. That dominance is only going to grow as an oil discovery in West Texas will provide between 46 billion and 230 billion barrels of new oil. This new find, the largest in history, will keep the United States on the path to dominate oil markets and add to an industry that employs more than 360,000 people in Texas alone.

The oil industry largely opposes Sitton’s proposal, as well as congressional calls for tariffs. The reason? While the Russia-Saudi oil war is creating problems in the short term, the long-term outlook for the U.S. oil industry is robust. Moreover, the oil industry has, for decades, demonstrated its ability to weather uncertain markets without resorting to trying to manage the market.

Thankfully, the message from Railroad Commission Chairman Wayne Christian last week was that the state should stay the current course. He noted that Texas doesn’t operate in a vacuum and that curtailment of production in Texas is no guarantee that other nations or states would follow suit. The chairman pointed out that free-market principles are the best approach and that lawmakers should avoid tariffs or production limits to support prices artificially. 

The United States has a long history of championing free markets, one reason the American oil industry is globally competitive. Cutting back American oil production or imposing tariffs would ultimately hurt U.S. refiners and consumers and cost jobs in places like Texas. Production quotas in Texas would hurt the state’s most efficient producers, raise prices for customers, and make it more difficult for the U.S. to criticize OPEC in the future.

The reality is that America’s new oil dominance has threatened the oil powers of the past, including Russia and Saudi Arabia. It’s a significant reason why they decided to flood the market with oil right now. By doing so, they hope to put a dagger in the heart of American shale producers and challenge the new paradigm of U.S. oil leadership. If we give in to bullying by these nations by cutting our oil production, we send the signal that they are winning the price war.

We won’t help the oil industry rebound by trying to game the market. These are tough times, but hasty policy decisions will only make them worse. We should be trying to grow America’s share of the global market rather than shrinking it. Protectionist trade measures aren’t the answer either. 

The winning path is to face this challenge head-on, trusting the fundamentals of an American oil market poised for growing production. Hasty reactions, including import tariffs and production cuts, only create collateral damage for U.S. companies and consumers.



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