President Donald Trump’s triumphant tweet that Saudi Arabia and Russia are open to substantial cuts to oil production may come with a big catch: the U.S. and other non-OPEC producers would have to join them.
Saudi Arabia’s desire for the world to share the burden means Trump would have to unify a fractious and discordant group of U.S. companies and states that haven’t faced output restrictions in nearly half a century, including about 6,000 shale drillers.
Trump is scheduled to speak with the leaders of the U.S. industry on Friday in what could be a contentious meeting. The American Petroleum Institute, which is dominated by larger producers, wants the government to stay out of the domestic market and focus on diplomatic efforts. Some independent producers in Texas are in favor of output curbs because, in part, they’re running out of storage. Others, such as Trump confidante Harold Hamm, want the U.S. to sanction the Saudis with anti-dumping tariffs.
Oil soared as much as 35% after Trump’s comments, but pared gains after Saudi Arabia and Russia didn’t confirm they had agreed to the cuts. The Middle East kingdom called for an urgent meeting of the OPEC+ producer alliance to reach a “fair deal” that would restore balance in oil markets, state-run Saudi Press Agency reported.
Ryan Sitton, the Texas oil regulator who first proposed the idea of America joining with the Saudis and Russians to reduce output, said it’s “short-sighted” to knock back the idea right off the bat. “Let’s have a conversation and figure out how we bring these different groups together,” he said in an interview on Bloomberg TV. Sitton later tweeted that he had a “great conversation” with Russian Energy Minister Alexander Novak on cutting 10 million barrels a day of global oil supply and was looking forward to speaking with Saudi Energy Minister Prince Abdulaziz bin Salman.
The prospect of capping U.S. production is a non-starter with many industry heavyweights, who blasted the proposal and are opposed to any broader effort. The API called pro-rationing an “anticompetitive” effort that would only harm U.S. consumers and American producers.
Oil industry lobbyists are warning the administration that any domestic quota system or coordinated output decrease would send a signal to Saudi Arabia and Russia that they are winning the price war. The approach could hurt efficient, low-cost U.S. oil producers, they argue.
Still, with oil trading near the lowest in two decades, unique times mean that usual rules may not apply.
A U.S. production cut “would be difficult but it’s certainly not impossible in these exceptional circumstances,” said James Lucier, managing director of research firm Capital Alpha Partners LLC. “Given the fact that you have the major oil industry CEOs meeting at the White House tomorrow and other independent E&P companies visiting the White House over the weekend, something like this is definitely going to be on the table.”
Technical and legal challenges would abound. Industry representatives have warned the White House that any curbs on field production could amount to trespass on the property rights of landowners, oil companies and royalty owners. While Texas and Oklahoma can install output limits — called pro-rationing — other states don’t have these powers. The federal government has strong influence over the Gulf of Mexico, Alaska and parts of New Mexico, where it owns lots of land.
Another option is to limit exports, which were banned for 40 years until 2015. Restricting those would likely be the most effective method of scaling back production, said Katie Bays, co-founder of Washington-based Sandhill Strategy LLC. That, coupled with letting producers use the Strategic Petroleum Reserve as storage, “would functionally seem to work for the next few months to take oil off the water.”
Although Congress lifted the oil export ban in December 2015, the president still has broad authority to reimpose limits. Under federal law, the president can declare a national emergency and impose export licensing requirements for up to a year, with the potential for additional extensions.
For shale oil producers in Texas, the largest oil-producing state, output cuts are coming irrespective of geopolitical concerns. They’ve already slashed spending budgets, employees and rigs. There’s such an overflow of oil that storage capacity is filling up fast. That could lead to producers being forced to shut in wells.
“The question is not will markets come into balance, the question is will it be done in a strategic and thoughtful way, or done in a reactive way once all the storage fills up,” Sitton said.
Read more: Why a Texas Oil Regulator Could Play the Role of OPEC: QuickTake
One of the biggest hurdles may be the reputational damage done to an industry that prides itself on individualism and hostility toward regulation. Many fossil fuel companies have for decades criticized renewable energy for benefiting from government handouts. And, as the financial crisis shows, once government extends a bailout, the public uproar is long-lasting.
“Americans have no sympathy for ‘oil billionaires’ and most of the country benefits from low energy prices,” said Mickey Raney, chief executive officer of Impact Energy Partners LLC, a small oil and gas producer in Oklahoma. “Our industry chose to accept the influx of Wall Street money that funded incompetent teams to drill wells that would never pay out. The management teams made millions in high salaries, stock options and cash bonuses for leading their companies into bankruptcy.”
“Properly managed companies must now find ways to survive in the mess created by ourselves, not by Saudi Arabia or Russia,” Raney said.
— With assistance by Stephen Cunningham
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