More On Demand and U.S. Production
Posted April 6, 2020
OPEC+ members continue to discuss a meeting, reportedly Thursday, to address the price war between leading members Russia and Saudi Arabia, whose production increases amid a significant decrease in demand are deepening the crisis for the global oil industry.
There’s speculation the United States will be asked to participate in a deal with additional production cuts beyond what U.S. producers have already implemented in response to the marketplace, which we addressed in this post. In a new interview with CNN, API President and CEO Mike Sommers reiterated that markets should dictate production decisions, not government interventions, and that Russia and Saudi Arabia should change their production policies.
First, some data and analysis from API Chief Economist Dean Foreman that helps capture the nature of the demand decrease:
- Total U.S. petroleum demand fell by 2.5 million barrels per day (mb/d) (11.9%) as of March 27 compared with February 2020. This is marked by decreases for gasoline and jet fuel.
- The current median projection among third-party estimates of the global demand decrease is 17.4 mb/d.
- The global oil supply/demand balance remains uncertain, but an attribution of changes suggests demand is likely to have roughly five times the impact of supply, even though most policy-related discussions have focused on measures concerning supply rather than demand.
Talking to CNN, Sommers pointed out important differences between Russia and Saudi Arabia and the U.S. in terms of industry model:
“You have to remember that in these countries like Russia and Saudi Arabia there are very few oil companies. In Saudi Arabia there’s really only one. In the United States, we have over 9,000 producers in this country and we live in a situation where one president or one leader can’t say, ‘Stop producing American oil.’
“So, what you’re seeing here is producers already responding to market demands. Based on some estimates, you already are starting to see 25 to 30% [reductions in U.S. companies’ planned capital expenditures] as a consequence of low energy prices, and we think that’s the right way to handle this. The market should be dictating these solutions, not doing it through some kind of government dictate.”
Sommers said the demand problem is acute. Before COVID-19 the world was using about 100 mb/d. Now it’s about 80 mb/d. People aren’t flying, they’re not driving. People are working from home. The solution to the demand problem is fairly clear, Sommers said: Get through COVID-19 and return people to work when it’s safe to do so.
The situation is affecting the global industry, not just the U.S., he said. He called it a “tragedy” for the domestic industry, which after the 2008 financial crisis launched an energy revolution that made the U.S. the world’s leading producer of natural gas and oil. Russia and Saudi Arabia have tried to use the current situation to gain a marketplace edge, he said:
“[W]hat you’re seeing now, is some producers like Saudi and Russia trying to take advantage of this situation of low demand, trying to drive these producers out of the market. We don’t think that that is appropriate and we’re working with the president and the rest of our government to make sure that producers aren’t putting this kind of oil on the market when the world is not demanding it.”
The demand crisis is seen in shrinking storage capacity. He stressed the need for resolution the Saudis and Russians, who’re also being impacted. Sommers:
“World storage is about to fill up and that is a huge concern not just for American producers, but it should be concerns all producers because low prices ultimately are not good for Saudi Arabia, they’re not good for Russia and you’re really going to hit a wall here on storage that could be very damaging not just to United States’ producers, but to world producers.”
The U.S. industry is being helped by the U.S. Energy Department’s plan to make 30 million barrels of the Strategic Petroleum Reserve’s storage capacity available to producers in the near term and another 47 million barrels later. Support also is coming via access to federal programs that are being made available to other American businesses, he said, but tariffs – which the president talked about over the weekend – could end up harming U.S. consumers. Sommers:
“[U]ltimately, the real people that would be affected by [tariffs] are the people that refine oil products. So, there’s a lot of value that is created by American refiners that take oil from all over the world and turn into the products that we use on a daily basis, whether it’s petrochemicals, gasoline or some of the household products that we have in our own homes. So, we don’t think that that’s a great idea.”
Again, the points Sommers makes strongly put the spotlight on Russia and Saudi Arabia to change production policies that have worsened conditions for all nations. U.S. companies already have and will respond to market dynamics. Artificial interventions such as tariffs and quotas ultimately risk doing more harm than good.
We’re in an almost unprecedented demand downturn with the measures to defeat COVID-19 also slowing economies, which in turn slows energy demand. Let markets work. Saudi Arabia and Russia can help by adopting production levels that align with the current market reality.
About The Author
Mark Green joined API after a career in newspaper journalism, including 16 years as national editorial writer for The Oklahoman in the paper’s Washington bureau. Previously, Mark was a reporter, copy editor and sports editor at an assortment of newspapers. He earned his journalism degree from the University of Oklahoma and master’s in journalism and public affairs from American University. He and his wife Pamela have two grown children and six grandchildren.