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Limit Monthly Oil Production

Columns appearing on the service and this webpage represent the views of the authors, not of The University of Texas at Austin.

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sunrise in an oil field

Everybody loses when oil prices become unsustainably low. The first-ever occurrence of West Texas oil price going negative recently was a concerning barometer for the state of the energy industry. Buyers who held oil delivery contracts for May but did not have the storage to take that delivery were pressed to unload their ownership as the settlement deadline approached.

Ultimately, they had to pay others as much as $37 per barrel to take excess oil off their hands at a time when prices plummeted — an unwelcomed exclamation point at the end of a disastrous month for oil prices thanks to a drop in demand due to COVID-19 and an oil price war driven by the Saudis and Russians designed to eliminate market competition.

This should concern all of us outside the oil patch.

We have greatly benefited during the past 10 years from affordable oil prices, largely due to the remarkable boom of domestic oil and gas supply, made possible through American technological and financial innovation exploiting the country’s shale resources.

Since 2008, the domestic oil supply has more than doubled, and net oil imports have been cut to zero. But the unsustainably low oil prices we are seeing now, and the associated bankruptcies and job cuts, risk the long-term health of the energy sector.

The loss of countless innovative companies and their skilled energy workforce may cause the U.S. industry to lose its competitive edge. Ailing or absent domestic suppliers may not be able to meet the rising energy demand of a post-coronavirus economic recovery. Imports could skyrocket and higher prices could follow, sending the economy back into recession or worse.

The Texas oil industry must survive without inequitably shifting wealth into what many see as an affluent sector of the economy. The proposal from two major independent Texas oil producers, Pioneer Natural Resources and Parsley Energy, is for the oil and gas regulatory body of the state, the Texas Railroad Commission, to use its legislated “prorationing” authority to better balance supply and demand in the market. The argument, based on Texas state law, is that the commission is required to act when market conditions result in the economic waste of the state’s natural resources — a condition that current oil prices certainly meet.

This is the right move for the commission to make. If it acts, Texas oil producers would temporarily limit their monthly production of oil in an organized fashion to stabilize prices and mitigate flight of investment capital and talent from the industry. As we have seen government act to protect the public health, action by the energy regulatory agency is now necessary to protect our energy infrastructure.

Some may question how limiting production just in Texas could possibly affect the global market. Texas — by itself — ranks fourth in the world for oil production, behind only the United States, Saudi Arabia and Russia, so its actions will speak loudly. Many experts also think a move by Texas would lead other states, along with Canada and Mexico, to reduce supply, supporting world efforts to better balance the market. The world oversupply is exceeding 20 million barrels per day and is quickly filling up all available storage facilities. Moves by North American producers, in concert with the already announced 10 million barrel per day cuts by OPEC+, could help stabilize the market, and that would result in long-term benefits for producers and consumers.

About 70% of our country’s energy comes from oil and natural gas. Our prosperity depends on a supply that is abundant, affordable and reliable. Allowing West Texas producers to fail in record numbers due to unsustainable prices could bring back the days of excess imports and $4 per gallon gasoline. A temporary regulatory intervention to counterbalance the extraordinary market disruption caused by a global pandemic is a safe bet for all involved to have a brighter future.

Jon E. Olson is the chair of the Hildebrand Department of Petroleum and Geosystems Engineering in the Cockrell School of Engineering and holds the Lois K. and Richard D. Folger Leadership Chair and the Frank W. Jessen Professorship at The University of Texas at Austin.

A version of this op-ed appeared in the Austin American Statesman, Abilene Reporter News, Corpus Christi Caller Times, and MSN.

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Texas Perspectives is a wire-style service produced by The University of Texas at Austin that is intended to provide media outlets with meaningful and thoughtful opinion columns (op-eds) on a variety of topics and current events. Authors are faculty members and staffers at UT Austin who work with University Communications to craft columns that adhere to journalistic best practices and Associated Press style guidelines. The University of Texas at Austin offers these opinion articles for publication at no charge. Columns appearing on the service and this webpage represent the views of the authors, not of The University of Texas at Austin.

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