"Oil fields are not like a wine bottle, where you can put a cork in it and come back to it later. Sudden stops damage the oil fields, and can lead to reduced production capacity in the future."
Jeff D. Colgan
Jeff Colgan, political scientist at the Watson Institute for International and Public Affairs at Brown University, weighs in on the current coronavirus-related tumble in oil prices, its impact on geopolitical power and climate change, and the U.S. government’s role in the now struggling industry.
WI: Why don’t oil producers simply cease production until demand approaches supply?
JC: Oil fields are not like a wine bottle, where you can put a cork in it and come back to it later. Sudden stops damage the oil fields, and can lead to reduced production capacity in the future. So, producers have a tough choice: Do they give up future oil production by shutting down, or continue to pump now, when the oil is worth low or even negative prices? In an extreme case, producers might even choose to burn their oil, when they want to avoid a shutdown and there is no storage for the oil. Russian industry players are considering that option now.
WI: Should the federal government be helping to support the domestic oil industry?
JC: There are good and bad ways to bail out the industry, and the Republican-controlled Senate is leaning toward many bad approaches, such as grants and loans without any strings attached. Democrats should resist any such bailouts for the oil industry as they perpetuate our dependence on fossil fuels and further damages to the climate. The first goal of a good oil industry bailout should be to help the workers and transition many of them into new well-paying jobs, and the second goal should be de-carbonization. In the long run, we want the oil industry to go away or decarbonize to stabilize our climate.
Even at low prices, some part of the U.S. oil industry will continue with or without government help; our aim should be to help the workers, their families and their communities hit hardest by this situation.
Low oil prices are great for consumers and may help many businesses, including airlines, cruise ships and all industry sectors transporting goods to consumers, get back on their feet. Low oil prices are hitting the producers very hard.
WI: What do you anticipate the U.S. oil industry will look like in the next year or so?
JC: In the next year, I expect consolidation, job losses, continued low oil prices and low profits.
Domestically, Texas, North Dakota, Alaska and Louisiana will be hit very hard, as the country’s largest oil-producing states. Spare a thought for North Dakota, which has very expensive oil production and typically produces 1.5 million barrels a day. It won’t happen overnight, but over time, most oil production in North Dakota will cease. That will devastate tax revenues and hurt employment for oil workers and the communities that depend on them, including downstream businesses and their employees, as well as schools, hospitals and other entities impacted by lost tax revenues.
Look for Exxon and Chevron, the two largest U.S. oil companies, to buy up distressed companies or those going into bankruptcies. Consolidation is a healthy part of capitalism. The government should not prop up “zombie companies” – those that can continue to drill oil but aren’t profitable – but that’s what it’s doing.
Exxon and Chevron should take a page out of BP and Shell’s book. These British companies remain committed to transitioning their business models to being more climate-neutral businesses in the long run. Exxon and Chevron are lagging behind, and that will eventually come back to hurt them. They should use this crisis as an opportunity for change.
WI: In your book, Petro-Aggression: When Oil Causes War, you posited that “global oil consumption is a significant cause of international war.” Will today’s huge glut of crude oil impact prospects for international war?
JC: Low oil prices represent mostly a good news story for peace; wars are expensive and we’ve seen that Saudi Arabia, which can’t afford a war right now, has pulled back from Yemen. The one dark cloud in that mostly optimistic picture is that the Trump administration has an incentive to make trouble in Iran, as the administration wants higher oil prices to benefit U.S. oil producers. When there’s trouble in the Middle East, oil prices rise.
WI: We haven’t talked about OPEC (Organization of the Petroleum Exporting Countries) yet. Does OPEC have a role in managing this situation?
JC: Ignore the headlines from OPEC; its promises are empty. It made headlines during Easter weekend (April 11-12) by making a deal to cut oil production, but OPEC will continue to struggle to balance global demand. The deal was a wildly insufficient cut compared to the global demand shortfall. OPEC’s compliance with its commitments is always an issue and will continue to become an even greater issue when Russia, with an even worse compliance record than OPEC, gets involved.
Jeff D. Colgan is the Richard Holbrooke Associate Professor in the Department of Political Science and the Watson Institute for International and Public Affairs at Brown University, and director of Security Studies. His research focuses on international order, especially as related to energy and the environment. He is a regular commentator on energy politics, with recent analysis published on Washington Post’s Monkey Cage and on Al Jazeera. Follow him on Twitter @JeffDColgan, media can contact Jeff at firstname.lastname@example.org.