State oil and gas regulators in Texas are considering instituting a production cut to shore up sinking prices for the first time since the 1973 oil crisis.
That the move is even being explored underscores the pain being inflicted on U.S. oil producers by the abrupt crash in oil prices earlier this month. The sharp downturn was sparked by the outbreak of a price war between Saudi Arabia and Russia — the world's No. 2 and 3 oil producers behind the U.S. — although it's since been exacerbated by the global response to the coronavirus.
Brent crude oil, the benchmark for the global oil market and for U.S. gasoline prices, plunged as low as $26 a barrel on Wednesday, a 50 percent drop from the start of the downturn just two weeks earlier. West Texas Intermediate, the bellwether for U.S. shale oil production, plummeted 56 percent in the same period, to just $20 a barrel.
Both types of crude oil saw considerable price jumps Thursday night into early Friday, after the Wall Street Journal first revealed that the Texas Railroad Commission, which regulates oil production in the Lone Star State, was examining whether to institute a production cut, fueling hopes that prices might soon recover.
"A couple of Texas producers have inquired into the feasibility of the Railroad Commission prorationing production," Commission Chairman Wayne Christian told the Houston Chronicle. "No formal change in policy has been proposed. Staff is looking into what that change in policy would entail from a practical standpoint at the agency."
"If prices go up, they're essentially going to have the same revenue-producing equal or even less volume, which means lower costs — so they're naturally interested in cutting back production," said Patrick DeHaan, senior petroleum analyst at GasBuddy.com.
The potential move fueled expectations — or perhaps hopes — that President Donald Trump, who has so far largely taken a hands-off approach to the oil crisis, would more assertively seek to broker a truce between Saudi Arabia and Russia. Crown Prince Mohammad bin Salman earlier this month abruptly ramped-up the kingdom's oil production after Russia refused to renew a production-cut agreement with OPEC.
The White House reportedly hopes to convince bin Salman to bring the kingdom's oil production back to its pre-price war levels. The administration meanwhile may seek to use sanctions to influence the Kremlin's potential response.
"We have a lot of power over the situation. We're trying to find some kind of medium ground," Trump said at a press conference this week. "It's very devastating to Russia because when you look, their whole economy is based on that."
There was added speculation that a production cut by the Texas Railroad Commission could be used by U.S. negotiators as leverage to bring the Saudis back to the negotiating table — a sign that even the U.S., which does not exercise direct control over oil producers the way that Riyadh or the Kremlin does, is taking unusual action to address the crisis.
"Everyone is united here, they're just saying it in a different way," DeHaan said. "They all want to cut back: They all want to see a shared sacrifice."
Such a move, though, is widely seen as a long shot. And, as if recognizing this reality, oil prices were already starting to sag again by late Friday morning, with Brent — which briefly popped above $30 a barrel, returning to the $20s.
"Right now, we don't have a set way to do this because it hasn't been done in 50 years," Railroad Commissioner Ryan Sitton said.
For one, any shared production cut in the U.S. would be enormously complicated: Private companies would need to coordinate in such a way as to avoid breaking laws against collusion.
"This runs right along the lines of collusion," DeHaan said. "That has to be very delicately balanced."
Moreover, the U.S. oil industry nowhere near resembles the top-down control exercised in Russia and Saudi Arabia. And its myriad companies and executives not only have disparate interests that are often in conflict 0they're also ferociously independent.
"I don't think a U.S. oil production cut is possible. It would be months of negotiation," said Steven Kopits, managing director of Princeton Energy Advisors.
The more likely scenario, he said, is a direct intervention by Trump between the Saudis and Russians: "I do expect that President Trump will lean on the Saudis to stop this insane policy and probably the Russians will agree to some modest curtailment in support of the Saudis. It'll be some kind of face-saving agreement," Kopits said. "I really think the Saudis are going to act before Texas politics shorts itself out."
