The Perils of a Proposal to Prorate Texas Production
Posted April 13, 2020
We understand the oil demand-side circumstances that have led to calls for artificial market interventions such as tariffs and quotas – including a proposal before natural gas and oil regulators in Texas to mandate oil production cuts in the United States’ No. 1 oil-producing state.
Tough market conditions are no reason to implement bad remedies, such as the Texas proposal, which is problematic at best.
That’s not just an API view. Economics and history argue strongly against veering from the principle of markets dictating production levels, which is a core principle of our industry.
The Texas Railroad Commission, which regulates natural gas and oil in Texas, should reject proration of production for a number of important reasons, including these:
Oil Demand Is Likely to Return
COVID-19 countermeasures – on top a slowing of world economics before the virus hit – have significantly impacted demand. API’s next Monthly Statistical Report, based on March data, will be out later this week, and those numbers should offer a better look at the extent of the decline in demand.
Still, we know that oil and natural gas are the leading fuels for world economies, and that once the world gets back to work, oil demand likely will rise. The U.S. Energy Information Administration expects the decline we've seen most likely will be temporary and that demand for oil should rebound in the second half of the year. So, instead of laboring under a government mandate – which cannot replicate the signals of a competitive marketplace – the state’s operators should be able to best position their assets for future demand increases.
History Says It Won’t Work – And Could Backfire
The province of Alberta in Canada stepped in to cut oil production in December 2018, trying to artificially raise prices for Western Canada Select crude. There was a short-term improvement in the price of Alberta’s crude, but a little more than a year later the price was worse, relative to other crude oils, than it was before the intervention. (See API Chief Economist Dean Foreman’s post on the unintended consequences of Alberta’s market manipulation.)
A Production Mandate Could Harm Texas
Markets, not government mandates, shape the most efficient and economically sound oil production. Proration, which the commission will consider, could hamper future Texas production and could put at risk the state’s long-term productivity.
If Texas mandates a production cut, not all producers in the state would be affected the same way. A proration policy would effectively create winners and losers among state operators, in contrast to competitive markets determining outcomes.
One more point: Texas would be acting in isolation, probably leading to increased production in other states and other places outside the U.S. In the end, there’s a good chance Texas could be the loser. Railroad Commission Chairman Wayne Christian:
"Texas does not operate in a vacuum. If we prorate our oil, there is no guarantee other nations, or even states will follow suit. From a practical standpoint, the Railroad Commission has not prorated oil in over forty years; we do not have staff at the agency with experience in this process and our IT capabilities to handle this process are limited at best."
There’s no question these are challenging times in the Texas oil patch and in other U.S. producing regions. But the path forward is not to mess with markets in ways that could end up hindering domestic producers.
Texas natural gas and oil regulators should look for carefully targeted policies that will help support industry – rather than impose an artificial emergency brake to production, which could up causing serious consequences for the state’s leading industry down the road.
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.
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