Oil, Toil, and Trouble

The lockdown, now entering its third month, is starting to do permanent damage to the economy which may take years to overcome. The Wall Street Journal reports this morning about a growing number of manufacturing plants, many of them in the industrial midwest, that have decided to close for good. And there is growing doubt that we’ll have a “v-shaped” recovery even if we reopen the economy soon.

One of the hardest-hit sectors is oil and natural gas, which was already reeling from abundant production and falling prices even before the virus crisis struck. Oil and gas prices are at or near historic lows adjusted for inflation, and the wreckage in the sector is evident. Energy producers large and small that carry large debt are unlikely to make it through. Chesapeake Energy warned today that it may not survive.

One answer being offered for the pain in the oil patch is for the U.S. in effect to join OPEC. Seriously. In Texas, the powerful Railroad Commission, which apparently carries on as an energy regulator because it doesn’t have many railroads to regulate any more, has been talking about trying to impose production quotas on oil and gas producers to help keep the price up—just like OPEC. The Trump administration has also talked of aid for the oil and gas industry.

This impulse should be resisted. The same people who defend the oil and gas industry from the left when the marketplace delivers high prices (and high profits) shouldn’t support subsidies and anti-competitive market manipulations when times are tough. The oil and gas sectors have been through wrenching market shakeouts before (at least three times in the last 35 years), and typically emerged stronger for it. The industry as a whole is more resilient and nimble than ever.

Already there are signs that oil has bottomed, and demand starting to rise again. Hedge funds are increasing their long positions on oil, and driving is starting up again. One of my favorite energy analysts, John Kemp, reports from London:

U.S. gasoline consumption has started to increase in a sign motorists are starting to use their cars more as the economic lockdown eases. Fuel consumption data show an economy that had adjusted to an exceptional economic shock by the middle of April and demonstrated some signs of improving in the second half of the month.

And the Wood Mackenzie energy consultancy, another good source of energy analysis, notes the same thing occurring elsewhere:

As economic activity has picked up, so has energy demand. US customers bought 6.66 million barrels of gasoline per day in the week to May 1, up 11% from the week before. Demand has been rising for four consecutive weeks, although it was still down 32% from the equivalent week of 2019.

In China, as people went back to work on Wednesday after the Labour Day holiday, traffic congestion was worse than last year in Beijing and other cities, including Wuhan, where Covid-19 was first identified. Worldwide, there were about 34,000 commercial flights on Wednesday, up from about 32,000 the previous week and an average of about 28,000 a day for much of April.

This chart from Bloomberg displays this rebound nicely:

The price of oil will soon follow, albeit very slowly.

Oil especially has always been a boom and bust industry, and has always attracted its critics, usually from the left. As everyone knows, North Dakota has seen a huge oil boom over the last decade because of fracking and directional drilling, and the boom has generated the usual complaints. Here’s one account of the North Dakota oil boom as an example:

An industrial society wanted oil, and the farmer sitting on top of it didn’t have to do anything more than sign his name to try for the jackpot. The eagerness was not confined to the unsophisticated farmer. A frantic land play involving virtually every major company began. “When I ran across a lease held by a man in Florida, I wouldn’t hesitate to charter a plane and send a man down to see him,” said a Shell official. Soon nearly 70 percent of the state’s land area was under lease. . .

Crowding of hotel and restaurant facilities was another irritant at first. Law enforcement and school facilities needs increased. . . Employers bemoaned the rise in starting wages of secretaries, waitresses, and laborers. Some merchants were irritated by the demands upon them made by the new types of middle-class customers, and privately fears were voiced as to what would happen to their quiet domination of the small towns. But the bankers, publishers, and other merchants were eager to identify themselves with progress and industrial growth. Here was a new source of wealth to provide the badly needed balance for rural North Dakota. . .

This and other familiar observations about the North Dakota oil scene appear in a book called The Politics of Oil by Robert Engler, which was published in . . . 1961.

Some things never change. Our oil and gas industry will rebound faster than our hard-pressed manufacturing sector. But better if we don’t go back to the old days of trying to safeguard the solvency of the sector by making it into a government-managed cartel.

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