Oil prices are plummeting — partly due to falling global demand caused by the coronavirus, but mainly due to a price war launched by Saudi Arabia and Russia.
Both nations have watched with alarm as the U.S. became the world’s largest oil producer over the past decade. Last month, they conspired to win back some of the market share they’ve lost. They flooded an already saturated market with cheap crude, hoping to drive American energy producers out of business. Now, the two nations seem ready to negotiate a deal and slash production.
If Saudi Arabia and Russia don’t pull off a satisfactory deal, President Trump and other government officials are considering retaliatory tariffs, quotas, and other protectionist measures. Though well-intentioned, such actions would ultimately backfire.
America’s oil industry has weathered hardships many times in the past — and always emerged stronger and more efficient. If our leaders want to maintain America’s energy dominance for the long haul, they should simply sit back and let the free market work its magic.
U.S. oil prices recently dropped below $20 per barrel, the lowest in nearly two decades. Credit ratings agency S&P warns that prices could crater to $10 per barrel later this year. Consequently, drillers are slashing spending and preparing to lay off workers.
To mitigate the damage and prop up domestic crude prices, the administration is considering tariffs on foreign oil. Texan leaders, meanwhile, are thinking of imposing production quotas throughout the Lone Star State.
Such measures would prove counterproductive.
First, any effort to artificially inflate oil prices would hurt drivers in the U.S. Gasoline prices are already falling to lows not seen in decades. At a time when millions are suffering financially due to the coronavirus, there are far worse things than saving money at the pump.
Second, tariffs would throw America’s refineries into disarray. The United States recently became a net oil exporter — but many of our refineries were built to process foreign grades of crude. If the administration interferes with refineries’ access to that oil, costs could soar for consumers. We could even see localized shortages.
More importantly, the U.S. oil industry will be better off without government intervention. In the past, it has survived various boom and bust cycles — and always emerged stronger.
Just consider the last time Saudi Arabia tried to drive U.S. drillers out of business in 2014. Back then, the Middle Eastern kingdom figured it could flood the market and ruin U.S. companies that specialized in fracking, a safe but highly technical drilling technique that extracts oil and gas from shale rock formations located deep underground. At the time, many of these frackers had a break-even price of nearly $70 per barrel. So when Saudi temporarily drove prices below $30 a barrel, many Americans predicted doom and gloom.
But that didn’t happen. Instead, frackers tightened their belts and innovated — and slashed their break-even costs down to $40 or less. Saudi Arabia eventually threw in the towel. And American oil production rebounded, reaching an all-time high of 13 million barrels per day this January.
Had the U.S. government intervened in 2014 and 2015, there’s a good chance companies would never have discovered more efficient techniques, leaving them in a worse position in the long run.
This current conflict is only temporary. Neither Russia nor Saudi Arabia can balance their budgets with crude prices this low.
Long-term, the U.S. oil industry has a bright future. Global energy demand is projected to grow for decades to come — and drillers in the U.S. are well-positioned to meet that demand. The Permian Basin alone, located in Texas and New Mexico, holds 46 billion barrels of oil — more than the entire globe consumes annually. That bountiful resource will still be there once this price war blows over.
America’s energy companies have always thrived under free-market policies, even when times looked tough. There’s no reason to abandon that approach now.
Drew Johnson is an energy and environmental policy expert who serves as a senior fellow at the National Center for Public Policy Research.
