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Does Big Oil Need Big Government to Survive?

For the first time in a while, Texas is considering curbing oil supply.

David McNew/Getty Images

One hot morning in 1931, rural townspeople awoke to the sound of an invading army: The government had sent some 800 mounted troops to impose martial law and enforce state-mandated production orders. This wasn’t some Stalinist horror show. It was East Texas, where the Texas Railroad Commission was pioneering a model that—in different forms—would keep the world’s oil industry running for nearly a century. Today, members of that same three-member, currently GOP-controlled body are considering a return to its roots—not imposing martial law, but again curtailing oil production to bring the market under control. It may be one of the few things that can save America’s oil and gas producers, and potentially the world itself, from catastrophe.

Since the oil price crash in March, outgoing Republican TRC Commissioner Ryan Sitton has been mulling the possibility of prorating oil: i.e., placing limits on its supply with the ultimate aim of bringing prices back up. Last month, OPEC and Russia (a shaky collaboration known as “OPEC+”) failed to agree on a supply cut to stabilize prices. A dip in prices, even under normal conditions, can spell disaster for U.S.-based producers sensitive to even modest price swings. But in this case, the problem was exacerbated by the coronavirus pandemic.

Signs for a Russia-OPEC deal this week have been more optimistic. Sources inside OPEC, though, told Reuters on Tuesday that any such cuts—which Trump has claimed could amount to some 15 percent of global supplies—will depend on curbing oil supplies outside of OPEC+, namely in Canada, Brazil, and the United States. Sitton has been chatting with Russian and Saudi Arabian energy ministers as well as the Secretary-General of OPEC about that possibility, and was invited to attend that body’s meeting in Vienna this summer. If he goes, it will be the first time someone in his position has done so since 1988.

Like the virus itself, collapsing demand for oil has spread fast. Globally, demand has dropped by an astonishing 30 percent as economies grind to a halt amid shutdown measures, in an oil market that was already oversupplied. Stores of oil worldwide are filling up fast, and in recent weeks, some drillers have even dealt with negative fuel prices, wherein they have to pay pipeline operators to ingest their product. As Amy Westervelt has tracked at Drilled News, the federal government has been trying to throw all manner of supports at the industry it recognizes is failing: The Federal Energy Regulatory Commission has pledged expedited cost-recovery approval for energy infrastructure; the administration proposed new rules rolling back fuel efficiency standards, which the car industry didn’t want but the oil and gas industry pushed; the Environmental Protection Agency has effectively suspended enforcement. These are long-standing priorities for a fossil-fuel-friendly GOP, being pushed through under the cover of a chaotic news cycle. But they may not be enough to turn things around for an industry facing its deepest crisis in 100 years.

Sitton can’t remedy this situation single-handedly, of course. He would need the support of at least one other commissioner. His colleagues, Christi Craddick and Wayne Christian, have said they support stabilizing oil markets broadly but have yet to take a position on proration. Both, however, caution enacting such a policy would be a heavy lift. The TRC, Christian argued in a late-March statement, “has not prorated oil in over forty years; we do not have staff at the agency with experience in this process and our IT capabilities to handle this process are limited at best.” The last TRC meeting, scheduled for late March, was canceled amid the Covid-19 shutdown. The next one will be held virtually on April 14 and may yield more clarity as to where Christian and Craddick stand. Democratic TRC candidate Chrysta Castañeda, formerly the lawyer for T. Boone Pickens—who has a nonzero chance of taking Sitton’s seat in November—has signaled her support of exploring production controls, too. Even if the TRC does agree to cuts, Texas still represents just over 40 percent of U.S. oil production.

Proration may also face pushback from powerful places. Big oil companies—speaking mainly through the American Petroleum Institute—have urged against supply cuts, leery, perhaps, of what empowering the government to interfere against drilling could mean down the line. Instead, they’re pressuring the White House to strong-arm Saudi Arabia and Russia into enforcing production cuts in their own backyards, with tariffs if necessary. But companies like ExxonMobil and Chevron have diversified balance sheets, which include less hard-hit sectors like petrochemicals, and can weather price swings more ably than small firms. Drillers Pioneer Natural Resources Co. and Parsley Energy Inc. have, by contrast, urged the TRC to consider cuts.

Despite the chilly reception TRC supply-cut proposals have received, such moves are standard practice in oil markets. Oil flowing through something even remotely resembling a free market is a relative novelty. Big oil’s nineteenth-century founding father, John D. Rockefeller, maintained a cartel over kerosene used for lighting through monopoly. As Robert McNally explained in his 2019 book Crude Volatility, the breakup of Rockefeller’s Standard Oil empire in 1911 was followed by about 20 years of a free-ish market for energy before the TRC and Oklahoma Corporation Commission, an analogous body, enacted what McNally calls “some of the most rigorous economic planning on an industry ever seen to man.”

From the Depression through the 1970s, the TRC could essentially control the price of oil in collaboration with a set of companies based in the U.S. and the United Kingdom, known as the Seven Sisters, who exercised quasi-colonial control over oil fields in the Middle East. OPEC took over the role of swing producer in the 1970s, as U.S. producers failed to keep pace with demand. But OPEC’s founders—in countries staking new claims to oil revenues generated within their borders—modeled their new association self-consciously on the TRC. They argued, per a 1959 article in Fortune magazine, unearthed by historian Michael Dobson, that an international, TRC-style institution “could keep crude-oil production in line with demand, allocate production equitably among producing countries and companies, and so maintain prices at or close to the elegant level maintained in the U.S.”

The oil industry’s present conundrum has, therefore, been around for as long as it has existed: There’s too much of it to go around. The challenge has been to keep oil companies from competing against their industry’s best interest: In that sense, oil has never really been a free market, but one contingent on heavy-handed state policy. This has come into sharp focus after low interest rates and successive rounds of quantitative easing following the last crash made it possible for competing firms to pursue capital-intensive fracking at an unprecedented scale, flooding oil markets with fuels. This rush of new drilling has been irrational in purely economic terms: Drilling and extracting all the world’s buried oil as quickly as possible—as frackers have—drives prices down in ways that make that drilling unprofitable; indeed, many of these independent upstart shale companies have never turned a profit and looked bound for bankruptcy even before the coronavirus reached U.S. shores. But it’s unsustainable for more existential reasons: Exploiting all the world’s developed oil fields would surge the atmosphere toward catastrophic levels of warming, even before all the new exploration fossil fuel companies seem keen to continue pursuing once this downturn passes.

Most energy experts do expect some sort of bounce-back in oil prices once the pandemic subsides; the industry is predicted to recover, at least partially. That won’t solve the longer-term questions plaguing petroleum, though: Who will step in to keep the market working? And will supply cuts always be in the name of keeping the oil industry afloat indefinitely or meant to phase it out entirely? The question now isn’t whether governments will intervene in oil markets, so much as which ones they will intervene in and how. In such a context, big American fossil fuel producers’ allegiance to some imagined free market for energy could end up being the shovel they use to dig their industry’s grave.