Support an Oil and Gas Industry in Trouble by Believing in Competition

Between losing demand from Covid-19 and a price war between Saudi Arabia and Russia, oil prices have collapsed, down by roughly two-thirds since January.  With much of the transport system shutting down, the loss of global demand has been unprecedented. Some analysts believe we could be looking at a short-term loss of 20 million barrels per day or more, a drop of 20% within a few short weeks.

On the supply side, after failing to agree on new production cuts in early March, Saudi Arabia, Russia, and a few other members of the OPEC+ group are planning to raise output by about 3 million barrels per day. The result has been a massively oversupplied industry, with refineries starting to shut down due to lack of demand and storage tanks rapidly filling.

American oil and gas companies and their employees have been hit hard.

The federal government and oil-producing state governments are struggling to find a policy response. Let me caveat what follows with a personal observation. I know how painful this is to companies, workers and families. After the first oil shock in the 1970s, my father, a construction worker in western New York state, lost his job and never worked steadily again. I still have nightmares about supporting my family every time the oil market collapses — and I’ve lived professionally through every one since 1985.

Acknowledging that pain, how do I think government should work through this?

Most importantly, by not abandoning our first principles. Our system of free enterprise is based on open markets and honest competition. It would be profoundly short-sighted and ultimately counterproductive to abandon that system by colluding with OPEC or propping up the U.S. oil sector with tariffs!

The system is what brought us the shale revolution and made the U.S. the envy of the world. It wasn’t a national champion that did that; it was independent companies, working determinedly for a competitive advantage.

In our system, investors take risks in the hope of making a return. That’s shale. Owners of companies in our system get the opportunity to make lots of money but also the opportunity to fail.  The rewards and risks are two sides of the same coin.

And now come the risks: The reality of the global market is that the conventional resources in Saudi Arabia and Russia are cheaper to produce.

Rather than asking for protection from global competition, shouldn’t U.S. producers – and U.S. policymakers – simply want a fair fight? We didn’t become the world’s dominant economy by running a system based on who has the best lobbyist or who is best friends with the president. Competition can be scary, but it is effective at driving efficiency and innovation.

Indeed, not so long ago the shoe was on the other foot:  government policy restrained the U.S. shale boom by limiting exports of crude oil, something that industry and oil state governors labored to overturn.  That ban was finally ended in 2016. Seeking government support now risks inviting future interventions that may cut the other way – for example, if the upcoming elections bring in a new administration or Congress.

That doesn’t mean we tolerate anti-competitive behavior at home or abroad any more than we do for other industries. But there are already well-established processes for bringing and judging such cases.

Are there cases when other factors should be considered? Of course. Like the hollowing out of U.S. manufacturing capacity a generation ago, the potential damage to the domestic oil and gas industry has economic, strategic, environmental and military implications. All of those are fair game for policymakers to weigh.

But we need to set a high bar, and those factors must clearly outweigh the broader benefits of a competitive system before the government should intervene. How would the U.S. look differently today if the horse-drawn carriage industry had asked for government protection from Henry Ford’s Model T, with better performance, cost, and environmental impacts, and succeeded?  There’s plenty of experience from our own industry — for example, how coal benefitted in the 1970s and 1980s when the government restricted the use of natural gas in the power sector.

Rather, in a changing competitive environment, government should focus even more closely on maintaining a fair and open competition. Some companies will succeed, and others will fail, but overall, investors – and the whole country – will adapt to new realities and be better off.  The ability to fail is one of the secret weapons of our system. The shale rock doesn’t disappear if a producer fails; when the market picks up, surviving companies can produce those resources when the price warrants it.

But with failure, we need heart. When my dad lost his job, our family relied on the social safety net provided by the government. Because of that support my siblings and I were able to finish our educations and start new lives in other fields. There are lots of things government and companies can do to help the workers manage in these difficult times. Making sure that affected workers have access to a social safety net isn’t socialism: it’s how we make sure the benefits of capitalism work for all of us. And getting the economy back up and running will happen faster with a safety net: it limits the lows of the economy.

That’s probably the best remedy for the U.S. oil and gas sector down the road.

This post originally appeared in the Forbes Blog on April 2, 2020.