Oil Industry Deserves to Compete on Its Merits
This should be a time for markets to shine in the face of adversity, but two opposing government-interventionist camps have stolen the limelight. The first defends subsidies for the oil industry as necessary to maintain jobs and domestic oil production, avoid an increase in imports and protect national security. The second camp smells blood in the water and seeks intervention to bury the domestic oil industry for perceived environmental gain. Policymakers should instead focus on clearing the path for fair competition, which is in the best interests of our economy and environment.
The Trump administration is pondering a variety of responses to the oil selloff, good and bad, ranging from subsidies to tax reform to regulatory relief. Texas regulators are considering the imposition of production limits aimed at artificially boosting prices. As these stakeholders consider their options, they should remember that this is not our first oil-price rodeo, nor will it be the last.
The last oil plunge happened in 2014. Prices fell far below what experts believed to be the breakeven range of $60/bbl to $90/bbl for U.S. tight oil projects. Facing tight or negative margins, suppliers aggressively innovated to drive the breakeven point down nearly 40 percent from 2014 to 2019. The resilience of American suppliers caught OPEC by surprise. With this important context in mind, let’s not underestimate American ingenuity, and instead focus policymakers on the circumstances that drive productivity. That’s the way to accelerate America’s comparative advantage.
Make no mistake: It will be a tough road ahead for the oil industry. But consolidation, even bankruptcies and layoffs, are natural stages of economic Darwinism. Those who emerge will be the strongest of the bunch, while those with weaker balance sheets, excessive debt and poor hedges will face the music. The turmoil may be tougher than in 2014, seeing that the current phenomenon reflects both supply- and demand-side shocks that the oil industry hasn’t witnessed since the 1930s. Yet through the years, struggle remains the law of growth.
As for the economy, it’s in America’s self-interest to let comparative advantage determine shifts in domestic production and imports for any good or service, while using macroeconomic tools rather than industry-specific favoritism to guide the labor market. Meanwhile, the security arguments for domestic oil production have long been overstated—a product of thinking of oil supply chains as fixed flows, rather than the fungible commodities they’ve proven to be. Starting a subsidy war with Russia or Saudi Arabia will damage the American economy and provide no national security benefit.
On the other hand, “keep it in the ground” theologians cheer the prospect of a domestic oil industry demise. But environmental pragmatists know that would be a mistake. Domestic companies are at the forefront of the global effort to decarbonize oil production and refinement; replacing cleaner domestic production with environmentally substandard foreign products would be no bargain for the climate. Better information and metrics on lifecycle environmental impacts will showcase the advantage of domestic industry and provide a capital cost advantage. The best path forward is to leverage domestic comparative advantage to the benefit of our economy and climate.
The oil industry doesn’t need an unfair break on the backs of taxpayers or consumers to accomplish this. Price controls, production limits and subsidies merely discourage proper risk management in the private sector, while undercutting incentives to innovate and drive down costs. Oil subsidies in a stimulus package will merely amplify calls to throw more public funding at ill-conceived non-oil energy projects, which provide little stimulus and a lot of waste.
Giving the oil industry a fair break—through a more efficient tax code, commodification of environmental performance and decreased regulatory burdens—will propel its clean comparative advantage. It’s the only way to simultaneously benefit the American economy today, along with taxpayers and the globe tomorrow. It’s time we make the most American of energy commitments by empowering U.S. industry to compete on its merits.
