By Jennifer A. Dlouhy and Stephen Cunningham
The decision by Saudi Arabia and Russia to flood the world with crude oil just as the coronavirus epidemic cuts demand has energy companies idling drilling rigs in the U.S. and is raising the specter of bankruptcies in the oil patch.
“This is what critics have always told the president: that it’s a global market and it’s globally priced,” said David Goldwyn, a State Department special envoy under President Barack Obama. “Just because you participate in a significant way doesn’t mean you control the outcome, and now we’re seeing that come home to roost as the Saudis and Russians duke it out to limit the growth of U.S. shale.”
The U.S. surge in production has been fueled by advances in horizontal drilling and hydraulic fracturing. Fracking, as it is known, has unlocked oil and gas locked in underground rock formations, but it is expensive, involving sand, chemicals and thousands of feet of pipe stretching horizontally out from each fracked well. Saudi Arabia’s bounty, by contrast, involves tapping conventional reserves, at far lower cost — putting U.S. producers at a disadvantage when global prices fall.
The limits of U.S. market influence haven’t dissuaded Trump from extolling the country’s status as the world’s top oil and gas producer.
Earlier: U.S. Net Exports at Risk; Bankruptcies Loom: Oil Crash Update
“The United States should never again be at the mercy of a foreign supplier of energy,” Trump told shale gas producers in Pittsburgh last October. “We are committed not only to energy independence but to American energy dominance.”
Yet plans by Saudi Arabia and Russia to bolster production could rob the U.S. of its title as the world leader. And falling prices for the U.S. crude benchmark, West Texas Intermediate — which rebounded Tuesday but still closed the day at $34.36 per barrel — are too low to sustain current production levels. At $35, the U.S. daily output, currently 13 million barrels, could be cut by 1 million barrels, according to BloombergNEF.
Tumbling oil prices around the world are shining a light on the U.S. shale producers that are most at risk because of heavy debt loads.
“I wouldn’t be surprised to see 55 to 60 bankruptcies” this year, compared with 50 last year, said Raoul Nowitz, managing director of restructuring and distressed asset support services at Solic Capital. That number may grow if the price slump persists for an extended period, he said.
For now, Trump has highlighted one upside: low gasoline prices. “Good for the consumer,” he tweeted Monday. “Gasoline prices coming down!”
But cheap gasoline might not be a boon for American motorists who are scaling back on travel plans as the coronavirus spreads. And the same dynamic will be at play for refineries: They normally would benefit from lower prices for the oil they use to make gasoline, diesel and jet fuel, but now they’re up against a virus-spurred drop in demand.
“Low crude oil prices now seem more likely to hurt the U.S. economy than to help it,” Kevin Book, managing director of research firm ClearView Energy Partners LLC. Falling oil “prices seem unlikely to fatten refiner profit margins, because coronavirus continues to suppress transportation fuels demand.”
The price war between Russia and Saudi Arabia was sparked by Russia’s unwillingness to cut oil production and prop up prices to the benefit of U.S. producers. That, however, should be seen as a consequence of American energy dominance — not a failure of it, said Benjamin Salisbury, a senior policy analyst at Height Capital Markets.
On the regulation front, Trump has delivered, as his administration eased rules governing fracking on federal land and limiting air pollution from wells. And Energy Department officials have gone on diplomatic missions to sell American energy to Europe.
“Why would a voter view what happened as a failure if the Russians are saying that U.S. shale broke OPEC production cuts?” Salisbury said. “Wouldn’t you say this is actually what energy dominance looks like?”
Pain in the oil patch caused by falling prices and layoffs could offer those voters a vision of the future under the energy plans offered by Democrats to discourage fossil fuel production and consumption, he added. For them, it’s a stark choice, Salisbury said: “If you think this is bad, what if we banned it completely?”