U.S. to OPEC: Don’t Drill, Baby, Don’t Drill
OPEC collusion used to be bad news for America. Now, the oil patch is cheering signs the cartel might rein in production.
OPEC, the dysfunctional cartel that has gifted case studies in the “prisoner’s dilemma” to business schools for years, unveiled an agreement to potentially cap oil production this year in what amounts to a last-ditch effort to shore up the price of crude after a costly two-year nosedive.
This week’s announcement, which for now remains little more than a promise among big producers to keep talking in November, is the first indication that the oil exporter’s club might be getting serious about reining in runaway oil production. If implemented — and all the details must still be worked out — such a cap on production could nudge crude prices higher. That would be great news for oil-dependent economies from Maracaibo to Moscow and a huge relief for the battered finances of Persian Gulf monarchies. News of the possible accord goosed markets around the world, sending crude up 6 percent Wednesday and boosting major stock markets as well.
But OPEC’s hopes of successfully colluding for once to jack up the price of oil are also getting a rousing welcome in a more surprising place: the United States, still the world’s biggest consumer of crude oil.
Since the OPEC oil embargo and gas lines of the early 1970s, the United States has tried to convince Saudi Arabia, Venezuela, Russia, and other big producers to keep the taps open so that oil remains abundant and affordable. But almost a decade into a major U.S. energy boom-and-bust cycle, many parts of the United States now stand to benefit — just like Saudi sheikhs do — from rising prices at the pump.
“Since we’re in a bust phase, and we’re so dependent on energy production for growth, and because it’s hurting so badly, now [a price hike] looks like just what the doctor ordered,” said Robert McNally, the founder and president of the Rapidan Group, an energy consultancy.
This year, many major U.S. producers were crowing about the “death” of OPEC, after the oil-producing cartel seemed to have shot itself in the foot by flooding the global market with cheap oil since November 2014. Yet some of those same wildcatters, including Harold Hamm — the chief executive of Continental Resources and energy advisor to Republican presidential nominee Donald Trump — have spent recent weeks begging OPEC to slash production to shore up prices. That’s because the prolonged spell of cheap oil has hammered U.S. oil companies that require higher prices to stay afloat; as a result of the drop, tens of thousands of oil patch jobs have evaporated.
It is a spectacular turnaround for a country historically scarred by OPEC embargoes, supply manipulation, and price spikes. The 1973-74 embargo led to long gas lines, spiking prices, and eventually Jimmy Carter’s sweaters. In 2008, as oil prices hit an all-time high, President George W. Bush implored Saudi Arabia to open the spigot and bring relief to embattled American consumers. Today, U.S. oilmen are asking for just the opposite — proof of how fundamentally the fracking revolution has transformed the United States from a gas-guzzling importer into a major producer (and exporter) of crude oil.
“It’s notable that a large part of the industry, of the U.S. oil patch, is now rooting for Saudi Arabia and the rest of OPEC to come together and manipulate the market and push up prices,” said Jason Bordoff, the founding director of the Center on Global Energy Policy at Columbia University and a former Obama administration energy advisor. “That’s something we used to lament.”
OPEC’s plans, if consummated, could take on a political tenor during this election year. The vast majority of U.S. oil production is concentrated in states that typically vote Republican, such as Texas, Oklahoma, and North Dakota. That’s one reason Trump’s campaign has been trying to convince global oil producers to throttle back so that oil prices can recover and jobs could return to hard-hit areas in West Texas and the Bakken shale fields in North Dakota.
The Trump campaign did not respond to requests for comment.
The downside risk, though, is for the rest of the economy. Higher oil prices would mean rising prices at the pump, just as Americans are returning to the road in force with record-high demand for gasoline this summer. Bordoff noted that despite the importance of oil drilling to regional economies, cheap energy is still better, on net, for the U.S. economy as a whole. In other words, what’s good for the goose in the oil patch and parts of many red states, may not be good for the gander that is the rest of the country.
To be sure, OPEC’s big announcement won’t by itself take care of the world’s oil glut, which since the summer of 2014 has knocked crude prices from about $115 a barrel to roughly $40. The big producers inside the cartel agreed in principle to cap their combined oil output at between 32.5 million and 33 million barrels a day by the end of the year. If successfully carried out, that would represent a slight decline from the all-out summertime production of recent months, which technically would make it OPEC’s first cut in almost a decade.
But even the tougher production target would do little, McNally said, to erase the overhang of crude oil sloshing around. That’s because OPEC expects the world to consume about 32.5 million barrels of OPEC crude per day anyway, meaning the market won’t start eating into the massive stockpiles of crude stored in tanks and tankers around the globe.
More to the point, OPEC members have agreed only to meet again in November to try to hammer out all the painful details, such as which countries will reduce production by how much. Those are the very same shoals of self-interest that have sunk untold OPEC agreements over the last half-century.
At the same time, two of OPEC’s biggest players — Saudi Arabia and Iran — are still at loggerheads, making a lasting agreement even tougher to secure. After sloughing off economic sanctions this year, Iran is racing to boost oil production and exports and regain lost market share. That makes it much less willing to stomach production cuts for the benefit of OPEC rivals, especially Riyadh.
Yet even with all those uncertainties, colored by OPEC’s own dismal track record of maintaining internal discipline, benchmark crude prices continued rising Thursday to tickle $50 a barrel.
“It is masterful management of market sentiment,” McNally said of OPEC’s announcement. “It’s not a return to management of oil supply.”
Photo credit: STRINGER/AFP/Getty Images