Oil and Coronavirus – A Tale of Strange Bedfellows

Just as COVID-19 was reaching pandemic proportions, negotiations between Russia and the Organization of the Petroleum Exporting Countries (OPEC) broke down when Russia refused to extend an agreement limiting oil production. The response from Saudi Arabia, OPEC’s largest member, was swift. Saudi Aramco, the nation’s oil producer, announced that it would increase production to 12.3 million barrels per day. Most observers believe this is the kingdom’s maximum production capacity although Aramco officials say they could produce even more and have pledged to invest in further production capacity.

Russia’s decision was likely directed at the United States and its policies and sanctions targeting Russian energy interests. Though the U.S. had sanctioned the Nord Stream 2 gas pipeline and Rosneft for doing business with Venezuelan oil giant PDVSA, the recent purchase of Roseneft’s Venezualan assets by the Russian government appear to have relieved some domestic political pressure on President Putin to do something – retaliate more forcefully – about U.S. sanctions. Adding to the pressure, the U.S. has also worked to prevent Russian oil exploration in the Arctic.

The administration’s diplomatic efforts have included Secretary of State Mike Pompeo traveling to Riyadh and both President Trump and Secretary Pompeo phoning Crown Prince Muhammad bin Salman. In addition, the administration also appointed Victoria Coates as special energy envoy to Saudi Arabia late last month. She previously worked at the National Security Council and as senior advisor to Department of Energy (DOE) Secretary Dan Brouillette. Coasts will be based in the kingdom, working alongside State and Energy Department officials. These ramped up efforts by the administration have not yielded demonstrable results as per-barrel prices have continued to drop to their lowest levels since 2002.

Here at home, the U.S. oil industry continues to experience historically low prices due to overproduction. And, in the wake of the Russian and Saudi decisions, the fracking industry is coming under increased pressure given its higher per barrel cost of production, which has led to industry calls for federal government assistance. There remain divergent views as to what such assistance should entail.

First, there exists a split between large and small oil producers over whether they want government intervention, at all. Second, initial reaction from some oil state senators was less than enthusiastic, suggesting instead that what oil producers needed was a stable market and not a government handout. Still, ideas were proposed including low-interest federal loans, faster drilling permits for federal lands and a lower royalty rate on oil and gas produced on federal lands, which currently stands at 12.5 percent. President Trump recently weighed in with an idea of his own: fill up the Strategic Petroleum Reserve (SPR). Indeed, Treasury Secretary Steven Mnuchin has suggested purchasing as much as $20 billion worth of oil.

Among the many issues with President Trump’s idea, first and foremost is capacity. The SPR only has space for an additional 77 million barrels of oil which would cost roughly $2.5 billion, hardly the $20 billion the Treasury Secretary suggested. Second, DOE may have the authority to make such purchases, but does it have the money? Last year, Congress appropriated $195 million for the SPR – far short of the amounts even DOE is suggesting. This left Congress with two options: either provide additional funding or agree to reprogram other DOE funds. There is also the issue of allocations. The SPR already has the maximum allocation of light sweet crude, which is what the fracking industry produces. Additionally, the

SPR is currently required to sell 5 million barrels per year to finance maintenance and upgrades of the SPR. Lastly, the expected global surplus of oil by the middle of 2020 is projected to be between 835 million and 1.3 billion barrels which makes it difficult to see how large an impact on price purchasing 77 million barrels will have. Secretary Brouillette has said that DOE is seeking additional storage capacity to bring the SPR capacity up to one billion barrels.

While the original Senate version of the Phase 3 COVID-19 stimulus package had $3 billion to fill the SPR, the final version had only authority to delay the required sale of oil this year. At the end of the day, House Democrats objected to aiding the oil industry and were thwarted in their attempts to assist the renewable energy sector. It is expected that, debate over the SPR and other oil industry specific measures will return in a future stimulus package.

President Trump has also recently taken a more personal role in this matter, meeting with key oil executives and suggesting he could broker a deal between Russia and Saudi Arabia to cut production by 10 million barrels. He’s even threatened tariffs on imported oil should an agreement on production cuts fail to come together. House Democrats, for their part, had wanted to use April as a month to showcase their environmental agenda starting with the roll-out of the report from the Select Committee on Climate Crisis. With that in mind, it seems unlikely that Democrats will agree to assistance for the oil industry without at least a similar scale of assistance for the renewable energy sector. That fight will play itself out as industries left out of the Phase 3 package jockey to get into the next bill.

With oil prices likely to continue to drop for the foreseeable future, and with no end in sight for the COVID-19 pandemic, what Congress does in the next few weeks could prove crucial for many small oil producers in the heart of Trump country. And while states like Oklahoma and Texas are unlikely Democratic pick-ups this fall, both the eventual Democratic nominee and President Trump will leave everything on the field to win a battleground state like Pennsylvania.

 

David Adams is a managing director at Cogent Strategies. David served as Assistant Secretary of State for Legislative Affairs and as Deputy Assistant Secretary for House Affairs to Secretary of State Hillary Clinton. He also has a distinguished record as staff director for the House Foreign Affairs Subcommittee on Middle East and South Asia and as professional staff for the Committee on International Relations. For David's complete bio, click here.