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The Alliance And COVID-19

Mar 23, 2020

By Karr Ingham, Petroleum Economist and Executive Vice-President

The fallout from COVID-19 continues and activity levels in the oil patch, already in decline since early 2019, are soon to be in free fall if not already. This is very likely the most rapid transition from economic growth to decline ever observed, and the same is true of the seismic downward shift in accompanying energy demand.

Less than two months ago, global crude oil demand in 2020 was expected to grow by well over 1 million barrels per day. US crude oil production had continued to increase to meet this rising demand, exceeding 13 million barrels per day in February 2020. Now, global crude oil demand will be sharply negative in 2020, falling by perhaps 8-10 million barrels per day by some estimates, and doing so in short order.

The market implications are unambiguous – crude oil production should fall to adjust to crashing demand, and this is the clear signal provided by sharply lower crude oil prices. This is what will happen in the US as drilling activity slows dramatically. There is no question the US is about to do its part in terms of contributing to the broader supply solution. Unfortunately, Saudi Arabia and Russia, the next two largest crude oil producing countries in the world behind the US have signaled they will increase production rather than decrease production. This is not inexplicable – it’s a play for global market share with each attempting to gain at the expense of the other, and at the expense of the United States. And this is wrong. It is counterintuitive to market forces, and it appears to be a blatant attempt to capitalize on a potential global health crisis and the proper response to stop the spread of the virus in its tracks.

The Texas Alliance of Energy Producers condemns the reckless actions by both countries to destabilize global energy markets in such an opportunistic fashion, and condemns their decision to attempt to punish the only major producing country in the world that is operating in a true market economy.

COVID-19 and these related energy market events continue to develop rapidly, and the Alliance has been in regular contact with state and federal lawmakers and regulators since Monday, March 9. The Alliance was instrumental in halting the planned sale of tens of millions of barrels from the Strategic Petroleum Reserve (SPR) scheduled to begin on Tuesday, March 10.

The Alliance also encouraged the Trump Administration to acquire additional barrels for the SPR at bargain prices, and indeed a new round of purchases has now been announced. Our thanks to Senators John Cornyn and Ted Cruz, along with other Texas lawmakers in DC for their assistance with the quick turnaround in SPR transactions. Specifically, our thanks to Congressman Dan Crenshaw, who immediately upon communication from the Alliance on March 9, contacted members of Congress from Texas and other producing states. They then sent a communique to the Trump Administration indicating their stiff opposition to the sale from the Strategic Petroleum Reserve.

We have also requested Administration intervention in the price war between Saudi Arabia and Russia. Any potential diplomatic success in getting the two countries to ‘stand down’ could easily be the fastest way to stabilize energy markets and reverse the rapid decline in crude oil prices. This is an international dispute between two of the three largest crude oil producers in the world and the US (the largest producer) is caught in the crossfire. Only the Trump Administration and Congress are in a position to exert meaningful influence on Saudi Arabia and Russia. We are grateful to Texas Senators Cornyn and Cruz for co-authoring a letter to Saudi Crown Prince Mohammad bin Salman bin Abdulaziz Al Saud urging the Kingdom to rethink its hasty decision to raise crude oil production, bringing great harm to the energy industry in the US.

Other federal measures are under discussion in Washington, DC; the Alliance is monitoring these events closely, and our governmental relations staff is in regular contact with the Alliance Executive Committee as to these developments.

The same is true at the state level. As talk of proration and other ideas are being kicked around in response to the onset of damaging market conditions, we want to make sure any proposed policy remedy does not prove ultimately damaging to the industry, and especially to independent oil and gas producers and the smaller operators in particular. The Alliance is also identifying measures that can be administratively undertaken by Texas agencies that may provide near-term cost or regulatory relief to operators.

The Texas Alliance of Energy Producers officers, senior administrative, economics, and governmental relations staff will stay on top of this rapidly evolving situation and will play an active role in developing and responding to any potential policy solutions that may emerge. As always, our goal is to stand in the gap for the oil and gas industry in the State of Texas, and in particular our great independent oil and gas companies, service and drilling companies, and all directly related industries.