Marcellus Shale Coalition Comes Out Against Oil Tariffs
We’ve brought you several stories about the Saudi-Russian oil price war underway in which both Saudi Arabia and the Russians are pumping oil like crazy and lowering the price they charge for their oil–all in a bid to bankrupt American shale oil companies. A number of ideas have been floated to “encourage” the Saudis to scale back on production, which would raise prices again (the Russians are a lost cause and not worth the effort). We’ve talked about an embargo on foreign oil coming into the country (see U.S. Sen. Kevin Cramer Asks Trump to Embargo Saudi/Russian Oil), and our preferred response, a tariff on foreign oil (see It’s Time for a $40/Barrel Tariff on Saudi Oil Coming into U.S.). Not everyone thinks an embargo or tariff is a good idea, including the Marcellus Shale Coalition (MSC).
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OPEC, the Organization of the Petroleum Exporting Countries, is a pact of colluding oil-producing companies that act to artificially lower or raise the price of oil around the world based on how much the colluders are willing to pump. OPEC is the antithesis of free trade. But it does serve a purpose that (unfortunately) all oil drillers, including U.S. drillers, depend on–keeping prices high enough to be profitable. OPEC added Russia in a loose confederation for the past three years or so, something referred to as OPEC+. But then Russia recently told Saudi Arabia, the main OPEC player, to kiss off and left the OPEC+ fold, preferring to pump as much oil as they can. Saudi Arabia responded by increasing its production too, to drive prices into the basement, causing Russia (and U.S. shale drillers) pain.
A week ago we brought you the story that predicted the price of oil would go from the $30/barrel range down to the $20/barrel range–something almost unthinkable. And then it happened within a few days! Now we’re reading of warnings from Barclays, one of the biggest banks in the world, that the price of oil may go as low as (GASP) $10/barrel. At that price, there’s maybe one producer in the world that can still make at least some money–Saudi Arabia. Everyone else would be upside down and heading for bankruptcy court.
The double shock of less demand for oil because the COVID-19 coronavirus crisis has shut pretty much everything down (worldwide) AND the Saudis and Russians pumping oil to the outer limits, continues to cause the price of oil to remain at historically low prices. The Russians are trying to bankrupt American shale oil drillers by driving prices into the basement. The Saudis are trying to bankrupt Russia for leaving the OPEC+ fold (and the Saudis certainly don’t mind if American shale oil drillers are put out of business in the process). The low price resulting from the double shock is affecting not only big American shale oil drillers but also mom and pop conventional oil drillers too. Particularly small conventional drillers in western Pennsylvania.
Last Friday MDN laid out three potential options for how the U.S. government can deal with the Saudis and Russians flooding world markets with oil, driving the price into the basement in a bid to bankrupt American shale oil drillers, a practice called dumping (see 
Should the U.S. government step in to help the American oil and gas industry, given the current double crisis of both lower demand (COVID-19) and oversupply (the Saudi-Russia oil price war)? We’ve written about rumblings that since the Saudis and Russians are dumping oil (selling it far below the price to make it) on the world market, in an attempt to bankrupt American shale drillers, that the government should consider either imposing tariffs on imported oil, or possibly embargo imported oil. Free traders are aghast at such a notion. Fair traders (like yours truly) are less aghast, although as a general rule we don’t favor government intervention in the marketplace. Below are two differing views on whether or not Uncle Sam should do something to help O&G. Interestingly, the American Petroleum Institute says “no way” to government intervention.
The world as we knew it radically and fundamentally changed over the past two weeks. That’s a fact. The double whammy of the COVID-19 coronavirus shutting down world commerce (causing a big reduction in the use of oil and gas), and the Saudis and Russians engaging in an oil price war, flooding the world market with oil at a time when oil demand has gone down, is going to have an impact on the oil AND natural gas markets in the U.S. (and around the world) for months, likely years to come. How much of an impact is yet to be seen. We think the impact will be big. The experts at RBN Energy have taken a stab at predicting how these events will affect the entire U.S. oil and gas industry in 2020. As part of their coverage, RBN looks at impacts on “gas-focused” drillers, primarily in the Marcellus/Utica.
U.S. Senator Kevin Cramer, Republican from North Dakota, sent President Trump a letter on Wednesday asking the President to take “immediate action” in slapping an embargo on crude oil imported from Russia, Saudi Arabia, and other OPEC countries. In 2018 (most recent stats) the U.S. imported nearly 1.5 million barrels per day of oil from Russia, Saudi Arabia, and Iraq. Cramer wants the spigot turned off from those countries in order to give our own companies the opportunity to supply oil to ourselves. We personally love the idea–but there are others (whom we respect) who strongly disagree with an embargo or any kind of governmental interference in the free market.
It’s getting bloody out there. Just two days ago we told you the “unthinkable” may happen, that oil may approach or hit $20/barrel (see 
Nobody knows just how low the price of oil and natural gas will go due to the COVID-19 coronavirus crisis (see today’s companion story), but that doesn’t stop prognosticators from rendering estimates of prices and (in this case) production levels. We spotted a couple of stories of interest. One story takes a stab at estimating where natural gas production in the U.S. will end up this year (down 2.4 Bcf/d), and another story estimates where oil production will end up this year (down 1 million barrels/day). Here are those predictions and rationale, for what it’s worth…
Yesterday we wrote that the price of oil is in a free fall, heading toward $20/barrel (see 
In early January, the average price for a barrel of oil was $63. Yesterday the price closed at $28.70. Word on the street is that the price may go as low as $20/barrel, soon, and stay there for a while. Why? Because the Saudis and Russians have oil-pumping fever. They’re pumping as much oil as fast as they can. And that’s producing a global surplus of oil chasing buyers who don’t want it. According to IHS Markit VP and head of oil markets Jim Burkhard, “The last time that there was a global surplus of this magnitude was never. Prior to this the largest six-month global surplus this century was 360 million barrels. What is coming will be twice that or more.” The price of oil has crashed–and unless the Saudis and Russians let up, the price will stay crashed for some time to come.
There is an increasing call from economists to “let the free market” determine who lives and who dies in the oil and gas industry. We won’t lie–we live in dire times. We don’t know what the outcome will eventually be. While the world is gripped in COVID-19 coronavirus panic, the Saudis and Russians have flooded the world markets with oil, forcing the price of oil to collapse. Now our own economists are writing that shale companies already teetering on the brink of bankruptcy should be allowed to go under. Don’t prolong the agony. There were already on the way out. But is that wise?
If you operate a company that sells a product (particularly a commodity product) you only have two ways of making a profit: Sell the product for more money or cut expenses (or both). For oil drillers, the price of the product sold is pretty much fixed. Some drillers have “hedged” their production, pre-selling future production at a specific price. But many don’t hedge. And hedging contracts typically don’t extend beyond a year. In the case of oil, the world market sets the price, and the price this week is about half of what it was last week. That means most shale oil drillers won’t make a profit–unless they can trim costs. One of the ways drillers are attempting to cut costs is by asking the companies that do the actual drilling and perform services for them (oilfield services companies, or OFS) to cut the rate they charge.
Back in the day, your humble editor, Jim Willis, worked first an intern and later as a paid staffer in the Ronald Reagan White House. Very cool experience for a hick kid from Upstate New York. After a stint at the White House, Jim stayed in D.C. and went to work on Capitol Hill, working for Congresswoman Helen Bentley (Republican from Maryland). One of Bentley’s favorite issues was to fight against the dumping of machine tools by foreign companies on the American market. Companies in other counties would sell machine tools here more cheaply than it cost them to make, using backdoor funding from their governments to make up the difference. Eventually, our machine tool companies couldn’t compete and would go out of business, leaving the market wide open to foreign competitors, at which time they would jack their prices up.