America Should Avoid Foreign Oil Entanglements
(Bloomberg Opinion) -- Taking down an adversary can be so satisfying, Far better, though, to co-opt them.
Which brings us to the notion of the U.S. joining with Russia and Saudi Arabia to curb oil production. Floated last week, most notably in an op-ed by a Texas Railroad Commissioner, the idea has run into opposition, including from the Commission’s chairman. Wayne Christian said it would clash with his “free-market conservative” leanings — though his observation that there’s no guarantee other states or countries will follow suit suggests he could be persuaded, if only enough folks got on board. Still, he’s right to feel some trepidation. As I wrote here, getting the government more entrenched in the energy market would be a godsend to oil producers — up until the moment a more climate-friendly administration took office.
Yet there is an alternative scenario; one offering succor not just to domestic oil producers but also Moscow and Riyadh.
The U.S. is part of the Big Three oil producers, along with Saudi Arabia and Russia, but also stands apart from them. It’s not a petro-state. Even Texas isn’t, with less than 10% of its GDP derived from oil and gas extraction, transportation and refining (the economies of Alaska and Oklahoma are weighted far more to oil and gas). America’s re-emergence as a net petroleum exporter is both nascent and small in domestic economic terms.
This is what makes the U.S. so damnably frustrating for big oil exporters. The country’s deep capital markets and distribution of power and mineral rights fueled the shale boom that upended OPEC. Those attributes don’t depend on the oil business but did supercharge it to the point where, in another great American tradition, it trashed its own economics.
Hence, beneath the rhetoric, the Saudi-Russian price war is a decidedly rearguard action. Both countries tout their currency reserves, which is fine. But while surviving and thriving sound similar, they are very different concepts. Neither economy — and, especially, political economy — is built for a world where oil is just another commodity bobbing around its marginal cost of production.
Saudi Arabia announced budget cuts last week, reverting back to the austerity it tried between 2015 and 2017, after the last oil crash. Capital spending has dropped by 60% already since then, so further savings look tough without eating into the other big (and politically sensitive) part of the public budget: wages. As for Saudi Arabia’s net foreign assets, the shortfall in oil revenue from low prices runs those down and could threaten the riyal’s all-important dollar peg in as little as four years, according to a recent report from Ziad Daoud, chief Middle East economist for Bloomberg Economics.
Russia, with its own currency stash, floating ruble and somewhat more diversified economy, is better positioned. Yet its fortunes still flow from the end of a pipeline: Energy accounted for two-thirds of exports in 2018 (when Brent crude oil averaged $70-plus per barrel). This is embedded in the economic structure. A World Bank assessment published in December found Russia’s human capital as a share of the country’s wealth remains far lower than the OECD average and, per capita, would take almost a century to catch up at current growth rates.
Dealing a blow to frackers by opening the taps into a demand void offers Riyadh and Moscow a chance to check shale’s disruption on the supply side and win back market share. But besides the immediate costs, it also carries a big risk. Painful as restructuring will be, the U.S. exploration and production industry won’t die altogether. The likelier outcome is that it consolidates, alleviating debt burdens and cutting costs. The end result will likely be a less-fragmented industry that won’t grow production by one or two million barrels a day every year — but is more resilient and will still grow whenever oil prices rise above, say, $60 a barrel. So Saudi Arabia and Russia would stand to gain from U.S. supply curbs not just because it would underpin prices today. It might also keep the industry’s least-efficient producers alive just enough to prevent a stronger sector emerging.
There’s one more potential benefit lurking in there.
America’s economic identity as primarily a services-led, energy consumer rather than an exporter in the OPEC mold carries a more insidious threat to the well-being of petro-states. Three years on from its first public airing, the Trump administration’s “energy dominance” mantra has aged like a fine wine-cooler. While the current crisis is the catalyst, the underlying issue is that America’s long-term prosperity is tied more to enhancing its efficiency and pioneering more sustainable forms of energy. Championing raw-material extraction as the next big thing in a digital economy is just weird.
Which is why Saudi Arabia and Russia would love America to keep doing just that. A U.S. government explicitly supporting oil prices is less likely to throw its weight behind alternative forms of energy supply (and demand). The opposition to federal action on climate change, embodied chiefly in the Republican-controlled senate, doesn’t merely shore up oil demand in the world’s biggest market; it restrains low-carbon policy and technology developments that could be adopted by other energy importing countries.
True, a new set of characters in Washington might shift course anyway. But such arrangements, and the lobbying they attract, have a way of sticking. Moreover, a notable split is developing in the oil sector, with several majors shifting to accepting the challenge of climate change while smaller producers stick to what they know best. The latter would be particular beneficiaries of a U.S. grand bargain on oil.
America’s re-emergence as an energy exporter has made the trade-offs about oil prices, producers and consumers more nuanced than a decade ago. Nonetheless, it is not a petro-state — and should be thankful for that rather than seeking to join an ever-more precarious club.
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.
©2020 Bloomberg L.P.