Domestic oil producers have encountered an unprecedented external turbulence in recent months. In response, almost a dozen interventionist proposals have emerged since COVID–19 drastically reduced transportation demand for petroleum beginning in February and peaking in March/April. Each proposal goes beyond the CARES Act’s general small business loan/liquidity program that applies to other industries as well.

What principles should guide energy policymakers? And what proposals would create their own problems and set unwanted precedent for anti-industry, anti-consumer regulation in the future?

General Principles

Free-market reliance is less situational than commonly realized. In normal times, the “creative destruction” of the marketplace, where the better replaces the good, certainly applies. But in abnormal times, market forces continue to be crucial.

Emergency energy policy should be guided by these principles.

  • Private property rights and market pricing should remain unencumbered to coordinate supply and demand and to prepare for normalcy.
  • Government as taxer and buyer can command the necessary resources; price edicts, forceful requisition, and ownership stakes should be avoided.
  • Relief should be pro-consumer, pro-industry, and market conforming. Regulatory burdens should be waived to relieve individuals and businesses without endangering safety.
  • New taxes and regulation tangential to the emergency should be avoided.
  • Any new authority and bureaucracy dealing with an emergency should be terminated upon a return of normalcy.

Proposed Interventions

No less than eleven pandemic-related public policies relating to upstream oil have been forwarded that are beyond the basic rules of the CARES Act. They are:

  • Federal loans in return for an ownership interest and/or output control
  • Federal payments for non-produced (in-the-ground) oil
  • Ethanol bailouts
  • Diplomacy/”jawboning” for global production cutbacks
  • Anti-dumping investigation/finding by the U.S. Department of Commerce
  • Market-demand proration by the Texas Railroad Commission
  • Import restrictions
  • Royalty-payment suspension on federal lands
  • “Cash for clunkers” 2.0
  • Purchases for the Strategic Petroleum Reserve (SPR)
  • Leasing space to private parties in the SPR

The last proposal, leasing SPR storage, market conforming and thus defensible, is underway. Nine companies have signed lease agreements for up to 23 million barrels, of which 1.1 million barrels has been stored. (Around 50 million barrels of space remains leasable.) Lease terms are not known; anything less than a competitive bid would potentially constitute a subsidy to the recipients.

Federal loans. Treasury Secretary Mnuchin has proposed that investment-grade producers be able to borrow from the Federal Reserve Bank. “We’re looking at a lot of different options, and we have not made any conclusions,” he stated on April 23. Loan recipients could be subject to either the feds taking an equity position or requiring reduced output.

This option is turns controversial to the extent it would put government in the ownership or operation of oil companies. Such intervention would be extremely difficult to administrate, create inequities, and set a precedent for Green New Deal-inspired intervention to regulate the industry nefariously.

Another concern is that the CARES authority be interpreted to allow debt-burdened firms that were in distress prior to the pandemic be loan-eligible, even to the extent of replaying existing debt with federal loans that could then be forgiven. “You can’t have capitalism on the way up and socialism on the way down,” said an executive of the American Petroleum Institute. Or simply put, don’t throw good money after bad.

Federal Payments for In-Ground Oil. At the request of the Trump administration, the U.S. Department of Energy has readied a program to pay producers to keep as much as 365 million barrels of oil in the ground as an extension of the Strategic Petroleum Reserve. (The SPR has authority to hold one billion barrels.)

The multi-billion-dollar proposal would put the feds into the upstream sector in unprecedented ways. Fossil-fuel foes see an opening. “We’re all for keeping oil in the ground,” said Greenpeace. “The next administration should not only make this policy permanent, it should ensure any money spent on the transition away from oil production goes directly to workers and communities….”

Ethanol Bailout. Ethanol demand has evaporated along with petroleum during the current pandemic. As of mid-April, prices had sagged 40 percent with approximately 50 percent of production halted. With a volumetric (rather than percentage) quota under the Renewable Fuel Standard, ethanol production stands to disproportionately back out petroleum. Indeed, corn interests are lobbying EPA to retain the quota-subsidy at the expense of the oil producers, refiners, and retailers.

Outside of the CARES Act, the U.S. biofuel industry has lobbied the Trump administration for financial aid via the Department of Agriculture’s Commodity Credit Corporation. It is one handout after another for an industry that had grown well beyond its free-market size as a motor-fuel oxygenate.

Diplomacy/ “Jawboning”. Last month, President Trump persuaded Saudi Arabia and Russia to reduce production by nearly 10 million barrels per day for May/June to help bring supply in line with crippled demand. The OPEC+ group has pledged to reduce their supply by lesser but significant amounts for the rest of the year and into 2021.

The problem is not only the likely gap between promised and actual; it also sets a precedent for mandatory U.S.-side action (see below on state proration).

Anti-Dumping Lawsuit. In March, Domestic Energy Producers’ Alliance began lobbying the Department of Commerce and the International Trade Commission to investigate “dumping” by Saudi Arabia and Russia.

A Section 232 finding to punish or discourage such imports, however, would boomerang on other domestic producers. The U.S. is a net exporter of crude oil, meaning that more domestic oil is sold abroad than foreign oil is imported. Restricted imports would be redirected to displace our exports, leaving supply and price little changed.

Market-Demand Proration. The Texas Railroad Commission considered a mandate to reduce the state’s production by one million barrels across the state (but not for wells producing under 1000 barrels per day). The proposal would have tied Texas’s cutback to new cutbacks beyond those already promised via international diplomacy (see above). The commission decided this week against it.

But voluntary shut-ins are well along in Texas and elsewhere, and promises made by other producers are speculative at best. Incentives to game or cheat the TRC proposal increase with the state’s cutback. Imports would be encouraged too. The fact that environmentalists favor mandatory proration is warning that “green” regulators will take over the program after demand recovers.

Import Restrictions. President Trump has threatened to impose oil tariffs to “protect” the domestic industry. But as a net exporter, the U.S. hardly gains by simultaneously reducing imports and exports. Some producers would win and others lose, and the market would be left with the inefficiencies of (government-rearranged) world transportation and trading logistics.

Royalty Suspension. The Department of Interior has the authority under the Deep Water Royalty Relief Act of 1995 to lower royalty rates for offshore oil (and natural gas) production in the Outer Continental Shelf.

Regarding future lease sales, a market-conforming proposal for lower royalties has been proposed from the think tank world where higher up-front bids could result. But for existing production, what is being proposed from industry goes beyond what the Interior Department can otherwise consider on a case-by-case basis to preserve offshore operations in a very low-price environment.

“Cash for Clunkers”.  Ford Motor Company has pushed the federal government to subsidize the purchase of old cars for destruction when a motorist buys a new car, a program undertaken in 2009 by President Obama under the name Cars Allowance Rebate System. A repeat of this $3 billion scrappage program could provide a federal subsidy of $5,000 per trade-in.

The purpose of the program was not only to spur new-car sales but also to improve fuel economy per vehicle on the road, an add-on to the Corporate Average Fuel Economy (CAFE) program. But eleven years later, CAFE has been updated, and active cars are built to last and desirable to their owners, not relics rusting in the garage.

Cash-for-Clunkers 2.0 has not gained political traction to date. Assuming the program results in a taxpayer-enabled reduction in fuel usage, the oil industry is hurt at a very vulnerable time.

SPR Purchases. One of the earliest relief measure was a White House request for $3 billion to buy up to 77 million barrels “from small to medium size American energy companies” to fill the SPR. Rejected in the CARES negotiation, the Administration floated the idea of making a special purchase of 30 million barrels using other budgetary means. This, too, was rejected, leaving the actualized alternative of renting SPR storage to private parties.


Upstream independents are growing frustrated with the lack of finalization of a special program beyond generic stimulus aid. “This is whack-a-mole stuff,” said one to Politico. “There is a huge interest to ‘do something’ to help. But it all sounds good until step two.”

Step Two should be avoided if that means new government intervention that helps some in industry at the expense of others, saddles future taxpayers for quick relief bucks, and creates a new entry point for the Green New Deal going forward.

The good news is that the reopening of the economy has started, meaning more car, plane, and ship travel is just ahead. It cannot come soon enough.


Note: This above list of pandemic-related proposals below does not include more extraneous suggestions to double the size of the Strategic Petroleum Reserve (as President Bush proposed in 2007) or to retaliate against Saudi Arabia for sending 40 million barrels to its half-owned Motiva refinery. As adding to government powers rather than demoting them, such interventionism cannot be supported from a market perspective.

Print Friendly, PDF & Email