The Texas Railroad Commission is faced with a very tough decision: Whether or not to set production goals for the state’s oil and gas industry. Chairman Wayne Christian has announced he is against the current plan being offered to cut production. He should reconsider.
The oil and gas industry is facing a problem long in the making. The coronavirus and price wars between Saudi Arabia and Russia have brought the issue into stark relief. For more than a decade, the financial model of the oil and gas industry has been failing. The oil and gas sector once led the world market; today, it is the poorest performing industry in the Standard & Poor’s 500, and it has been that way for the past few years.
The problem is caused by an oversupply of oil and gas brought on by the technological revolution unleashed by unconventional drilling. The new technology has added more supply, making Texas a leader in global markets. This has disrupted the political glue that held OPEC together. But it has also driven oil prices down to an unsustainably low level.
The need for regulation stems from an imbalance in oil markets that will not be repaired by continued adherence to an outdated economic growth model. Business as usual will mean continued disruption and bankruptcies. The next business cycle will be led by large oil majors that are a shadow of their former size. ExxonMobil hit $500 billion in market capitalization in 2007. Today, it is under $200 billion, taking on heavy debt levels and in no position to snap up distressed assets. Business as usual means the oil and gas industry stays in last place in the stock market and continues to destroy investment value. Stabilization of an industry that is performing so poorly is not a worthy regulatory goal.
Christian is saying no to proration because he feels it will violate basic free market principles. It is not a free market when a group of foreign nations has historically worked in combination to fix prices. Now that OPEC is falling apart, there needs to be a counterforce. The counterforce should be the RRC uniting the oil and gas industry into a public interest, one that advances the free market principles that Christian believes are threatened.
There are many ways that the RRC can act so that some sense of order can be established. Any rule is better than no rule, and no rule is perfect. Proration is the best of a series of difficult options. But the same goal can be achieved, as Christian implied, by greater attention to flaring. The commission must be concerned about waste, and if ever there were a poster child for demonstrating that current production is producing waste, the image of burning fuel at the well head is it.
The true aspect of a free market that Christian is protecting is the right of owners to determine which wells are drilled, when and in what quantities. It is clearly within the domain of the Texas Railroad Commission to regulate waste-producing production, like flaring. Done thoughtfully, the goal of reduced emissions can be achieved, along with a slowdown in production.
This type of regulation’s impact on emissions, production and price remains to be seen. The implementation of such rules will influence jobs, taxes and the state economy. This will need to be monitored carefully, but Texas has remained a powerful growing economy even as oil and gas has faltered. Smaller oil and gas-producing states need leadership, and this is the moment for the state’s leadership to act as a powerful voice in the global disarray that now governs. Right now, the world is watching Texas.
Texas is the largest state oil producer in the country that produces the most oil and gas in the world. It is not a small player unless it acts like one.
Sanzillo is director of finance at the Institute for Energy Economics and Financial Analysis with 30 years of experience in public and private finance, including as a first deputy comptroller of New York State, where he held oversight over a $156 billion pension fund and $200 billion in municipal bond programs.