A Trump Texas Oil Deal Opens the Door to a Green New Deal
(Bloomberg Opinion) -- If President Donald Trump is floating the idea of the U.S. sitting down with OPEC, and the Texas Railroad Commission is offering to help, then oil must be having a normal one.
Oil prices and equities lurched up off the floor Thursday after Trump said he might intervene in the Saudi-Russian price war at the “appropriate time.” It’s a tad vague and perhaps should be judged in light of the president’s sense of timing (and veracity) on that other crisis he’s nominally overseeing. Still, Ryan Sitton, the outgoing Railroad Commissioner, who was happy to see West Texas lit up like a gas-fired carnival if it meant more barrels, also chimed in. In an op-ed published by Bloomberg Opinion today, he now proposes curbing 10% of Texas production to tee up a grand bargain with Saudi Arabia and Russia.
For the most abyss-adjacent oil producers, the prospect of Uncle Sam Houston playing Santa Claus must be as joyful as it is unexpected. They should be careful what they wish for.
The swing from energy dominance based on the raw capitalist power of American fracking to something more like energy endurance supported by the state is of back-throwing ferocity. Yet it isn’t completely out of left field, either. The Railroad Commission used to regulate oil production; indeed, it provided the model for OPEC. Moreover, energy dominance, with its curiously retro Red Square fetish for sheer quantity, encouraged many frackers in their mad dash for growth at all costs. They also relied on OPEC to support oil prices. Now the Saudi-Russian price war, dovetailing with the plunge in oil demand due to Covid-19, has revealed the rot in E&P balance sheets.
There may have been a time when the very idea of Washington (and Austin) intervening so overtly to protect the wildcatters would have been dismissed out of hand. But that was before the shock of the financial crisis ushered in a shift toward what Kevin Book of ClearView Energy Partners termed “command capitalism” in a report published a year ago.
That crisis ushered in enormous state intervention in an effort to ameliorate its fallout. Trump’s shock election in 2016 owed at least something to the inequalities and insecurities built up over roughly three decades of neoliberal economics, starkly revealed after 2008 (Trump repaid the favor with a tax cut reinforcing said inequalities, but whatever). Meanwhile, under Trump, the Republican Party embraced such previously unthinkable intrusions to the free market as sweeping trade tariffs and barely disguised attempts to subvert markets for favored industries such as coal mining. And although efforts continue, Republicans have failed to upend the healthcare reforms of President Barack Obama, largely because few Americans want to go back to the old system.
Now we’re living the pandemic-themed sequel to 2008, minus the Tea Party (how about that?). As my colleague Pankaj Mishra wrote recently, the Covid-19 crisis means the state “is back, and in its fundamental role: as Leviathan,” smoothing off life’s rougher edges for citizens. Mishra’s message, though, is that Leviathan brings sharp edges of its own. Oil producers should take a break from high-fiving to think about that.
Consider: Covid-19 is a global threat requiring trust in science and rapid, coordinated action (and where Trump originally played down the risks). Sound familiar?
Decades of opposition by fossil-fuel producers to more market-based approaches for dealing with climate change, such as carbon pricing, along with outright denial, have amped up the sense of urgency (and anger) around the issue, particularly among younger Americans. The result has been a striking shift in policy proposals away from taxes and fees toward state-prescribed mandates, exemplified in last year’s Green New Deal resolutions. It just so happens the #GND also came with a populist wish-list of federal job guarantees and massive public investment in infrastructure.
Today, the government may seem like the struggling fracker’s friend. After three years of shredding regulations and ignoring climate change, the administration appears to be contemplating a once-unthinkable attempt to effectively regulate (read: support) global oil prices.
When you’re in a deep hole, you don’t think about how the landscape might change up top. But it’s becoming something unrecognizable. The oil market grew up alongside, and was enabled by, globalization and post-war free trade. These were fading already. Now they’re disintegrating as Covid-19 gives us a taste of the sort of disjointed, fractious future spelled out in geopolitical analyst Peter Zeihan’s new book “Disunited Nations.”
Similarly, state-led help for oil’s stragglers should inspire strife in the industry’s ranks. The E&P business needs a shake-out rather than a bail-out. Indeed, while the process would be painful , a restructured shale business would be far more resilient than today’s. Even with tempered growth, it could set an effective price cap on oil (Saudi Arabia and Russia should also be careful what they wish for). So potential consolidators, who didn’t spend themselves into penury, should have their pick of targets when the fog clears — and lobby against state aid.
Above all, a grand bargain for oil would take energy further into command capitalism. Sitton may wrap his appeal in the usual tropes of liberty, but his bare argument beneath is that we have to burn the free market in order to save the free market. For an oil industry ill-prepared for climate change, having spent decades trashing its credibility, state-led energy policy will be friendly right up until the moment the cast changes.
I’m not making hard predictions about who gets elected and what they enact; GND-ers should contemplate what nationalism might do for coal, especially in Asia. But I am reasonably sure America’s 21st century energy system ultimately will not revolve around the sort of handshake deals with ailing petrostates that defined the last century. What we are witnessing is an industry in desperate straits reverting to what it knows rather than what is best. This may buy its weakest members some time, but would also lay yet more groundwork for potentially radical intervention of a different order.
Something politicians could help alleviate at the employee and local level, rather than at the corporate level. Just a thought.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Liam Denning is a Bloomberg Opinion columnist covering energy, mining and commodities. He previously was editor of the Wall Street Journal's Heard on the Street column and wrote for the Financial Times' Lex column. He was also an investment banker.
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