Opinion

Free-Market Principles, Not Overreaction, Key to Resolving Oil Market Volatility

Saudi Arabia’s recent announcement that it would abandon restraints on its crude oil production has sent shockwaves through the global oil market. The price per barrel of oil has plummeted from $60 per barrel at the beginning of the year to the $20 range earlier this week.

Producers and politicians alike have justifiably expressed concern. After all, the U.S. oil industry is a major driver of jobs, gross domestic product and tax revenue. In response to the flood of massive new Saudi oil supplies, a number of so-called solutions for the U.S. oil industry have also been floated by policymakers.

Among the first was an idea floated by Ryan Sitton of the Railroad Commission of Texas, who suggested curtailing oil production in the state. The three-member commission, which regulates the Texas oil industry, last limited oil production in 1973.

Meanwhile — in the wake of Russia’s subsequent decision to wage a price war with Saudi Arabia — nine U.S. senators, including Senate Environment and Public Works Committee Chairman John Barrasso (R-Wyo.), sent the Commerce Department a letter asking it to use all its authorities related to imports to push back against flooding of the market.

Other signatories to the letter have gone even further with their requests. Sen. Kevin Cramer (R) of North Dakota has asked President Donald Trump to place an embargo on foreign crude oil, while Oklahoma Sen. Jim Inhofe (R) has called for tariffs on foreign oil imports.

Before Congress engaged on the issue, oil producers were already reacting to these market fluctuations, taking steps to reduce their production. But drastic times don’t always call for drastic measures. In fact, much of what is being proposed in the name of buoying the nation’s oil industry could actually backfire, creating collateral damage for customers and oil manufacturers alike.

In the 1970s, for example, a Republican-led federal government tried in vain to influence the oil market with interventionist policies in the form of price controls, only to exacerbate long lines and empty gas tanks. Lawmakers in Washington should learn from this mistake. As economist Thomas Sowell explained, the “basic level of economics is seldom understood by the public, which often demands ‘political’ solutions that turn out to make matters worse.”

The reality in Texas, meanwhile, is that the production quotas proposed by Sitton likely won’t matter at all on a global scale, a point underscored by Commerzbank, a group that analyzes the oil market, when it explained that “given the sheer size of the surpluses, it would probably not even have any great impact at the moment.” And instead of boosting the economy, these quotas could actually raise prices for consumers and penalize more efficient energy producers in Texas. Any other states — and lawmakers in Washington — considering similar measures should take heed.

There are practical limitations to production controls and tariffs, too. As Chairman Wayne Christian of the Railroad Commission of Texas has pointed out, “the Railroad Commission has not prorated oil in over forty years” and lacks the staff, technology and experience to carry out the task.

In addition, imposing tariffs involves a thorough investigation and information gathering process by the Commerce Department. Absent an executive action taken by Trump, which seems unlikely at the moment, tariffs aren’t going to help the U.S. oil industry anytime soon.

The more practical approach is to produce more oil, not less. That’s because the United States is the world’s leading player in the oil market, producing 2 out of every 5 barrels worldwide. Massive new oil finds and innovative technologies that have enabled domestic producers to reach ample U.S. shale reserves will only increase America’s advantage, meaning that staying the course, not cutting production, is the smart play in the long term.

As Dan Eberhart, chief executive officer of Denver-based oilfield services company Canary, explains: “We won’t help the oil industry rebound by trying to game the market. These are tough times, but hasty policy decisions will only make them worse.”

Low oil prices will cost jobs in the energy sector in the short term and revenues will suffer, but the best course is one that relies on free-market principles and a trust in America’s vast oil supplies. A hasty reaction, one that overlooks the collateral damage of production cuts and the impracticalities of tariffs, will do more harm than good.

 

George Nethercutt was a Republican member of the U.S. House of Representatives from 1995 to 2005, representing Washington’s 5th Congressional District, where he served on the House Appropriations Committee.

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