The Oil Price Collapse Blame Game Begins
During the course of calls and media appearances I’ve made over the past several days, one question that keeps arising is who should we blame for this latest collapse in crude oil prices? It’s an interesting question, one that really has no easy answer. Let’s look as some of the possible candidates.
President Donald Trump – One interviewer said he was receiving a lot of calls and emails blaming the President and his “American Energy Dominance” policies for the current situation. While it is true that the Trump Administration has rolled back some regulations and implemented policy changes designed to spur oil and gas drilling, most of those apply on federal lands and offshore provinces, areas that have played only a small role in the rapid rise in U.S. shale production that has played a major role in creating the current glut of crude on the global market. As I’ve repeatedly pointed out over the last few years, the federal government has no lever of power that would allow it to control the drilling habits of the free-market U.S. industry. Blaming the President or anyone else in the federal government misses the boat.State regulators – This option is a little more valid. Regulators like the Texas Railroad Commission, the North Dakota Industrial Commission and the Oklahoma Corporation Commission possess the authority to limit both oil and natural gas production on a well-by-well basis. It has been obvious for several years now that the rapid growth in U.S. shale production was contributing to a fundamentally over-supplied market, which would have disastrous consequences if the OPEC+ deal to limit exports fell apart. These state agencies are the only regulatory authorities with the power to enforce some level of discipline on the upstream industry, and they have all chosen to forego the use of that authority. History will judge whether that inaction was wise. Investors – Corporate leadership teams have little choice but to respond to the desires of investors, and there is no question that the actions of the U.S. investor community have helped to create the current crisis. From 2016 through mid-2018, investors pressured upstream companies to increase production as rapidly as they could, even when that meant taking on huge amounts of debt in order to finance all the drilling. Investor pressure then turned on a dime in the summer of 2018, to a new focus on increasing investor returns, again even if that meant taking on even more debt to finance higher dividends and stock buyback plans. This was all sustainable at a $55 per barrel WTI price. At $34 per barrel, not so much. S. producers – Certainly, company leadership teams are responsible for their own plight at the end of the day, a reality to which pretty much all of them would admit. But again, so much of what these men and women decide to do is a response to the realities in the market and pressure from investors, all of which take place in a highly-competitive environment. That does not absolve them of decisions to overpay for acreage or acquisitions of other companies, or to take on unsustainable debt. But recognizing the realities of the marketplace does mitigate their level of responsibility for the creation of the latest price collapse. OPEC – the reality is that, absent the cooperation of Russia and other non-OPEC nations, OPEC’s ability to support a price certain – its very reason for existence as a cartel – is basically non-existent. Thus, pointing the finger at this hapless group of exporting nations becomes an exercise as futile as the entity itself has become. Let’s move on.
Russia and Saudi Arabia – Here we arrive at the crux of the matter: Two major exporting nations who have become irrational actors on the global stage. Russia’s decision to try to blow up the OPEC+ arrangement is an irrational act for a country with a moribund economy and very low cash reserves. Saudi Arabia’s decision to respond to Moscow’s irrational action with an irrational action of its own – flooding the market to further drive down crude prices – makes sense only as part of another attempt to destroy the U.S. shale industry. As many have noted, Saudi Arabia already went down this sorry road once, in 2014. America’s shale industry not only weathered the bust of 2014-16; it recovered to the point of creating the largest oil boom in American history from 2017 through 2019. Indeed, for all its faults, the U.S. oil and gas industry has proven time and time again to be one of the most resilient business sectors ever created by mankind. Its 170-year history is littered with the carcasses of those who have predicted its looming demise with the same certainty we see coming from its critics today. There are many people and entities to blame for this current price collapse. The next question, though, is whether any of those currently pointing fingers of blame will bother to take the time to give credit to those who are responsible for creating the industry’s next comeback when it inevitably arrives?