Oil war: Who first broke the main taboo?

By | April 6, 2020
Oil war: Who first broke the main taboo?

The collapse in oil markets and the problems of shale companies in the United States are forcing both American politicians and the country’s oil companies to search for unusual solutions, some of which were still considered impossible, illegal, unnatural and generally “a betrayal of national interests”. A well-known and cynical English proverb gives a clear recipe for optimal actions in a situation of collision with an irresistible force, it can be translated roughly like this: “you Can’t beat someone-join the winners.”

If we apply this saying to the current reality in the international oil market, it turns out that since it is impossible to win the price war with Saudi Arabia and Russia, or the victory will be Pyrrhic, it is logical to join the winners. It is because of this that the American state regulator of the oil market (more precisely, the regulator responsible for shale producers) did the unthinkable — contacted OPEC representatives. Moreover, the American side has already put on the table a plan to stabilize the world oil market.

The implementation of such a plan is still very, very far away, and complex (multilateral) negotiations can break down a thousand times. But in this case, the important fact is that on a practical level, one of the main taboos of the world market has been broken: the Americans are ready to at least discuss the possibility of giving up its share in exchange for an increase in oil prices.

Ryan Sitton, who, apparently, will act as an American negotiator, indicated through the business information Agency Bloomberg the starting negotiating position of our overseas partners: “Theoretically, Texas can reduce production by ten percent, and if Saudi Arabia is willing to reduce production by ten percent compared to the pre-pandemic level, and Russia is willing to do the same, this will return the market to pre-crisis levels (and only to some oversupply of oil).”
Oil war

As you know, since the struggle of the US authorities with oil oligopolies in the XX century, American oil companies can not (under the threat of serious penalties) coordinate production among themselves, and even more so with foreign producers. But specifically, Mr. Sitton is one of the leaders of a government structure that can reduce American production with the stroke of a pen, having every right to do so. This state structure has the deceptive name “the Railroad Commission of Texas”, and this name has been given to it since the XIX century when it administered the transport market, and now regulates, among other things, oil production in the main oil (and shale) region of the United States. Mr. Sitton is the Commissioner of this structure, and, by his own admission, he will have to negotiate with OPEC.he has already received an official invitation.

Some American politicians and American oil companies will probably strongly resist any restrictions on production and may even do so in court, but specifically, the Texas state regulator can “turn the valve” without their consent and without introducing any new rules or regulations.

First of all, the Texas regulator issues and extends (and can also revoke) permits for burning associated gas: American shale companies massively apply this practice, which has long been demanded to ban both environmentalists and some economists. In the name of increasing or maintaining production, shale producers simply burn gas that is produced along with oil, and American profile journalists emphasize that the older the well, the more gas it comes out of it. If permits for this practice are restricted or suspended altogether, shale production will decrease proportionally, and environmentalists will be happy.
Oil war

The second available method is much cruder and somewhat resembles the use of a stop-tap, but in extreme cases (and if Texas is talking to OPEC, it is an extreme case), it can be used: to replace falling production, shale companies must constantly drill new wells, but the same Commission issues permission for each of them. If this process is blocked or just severely slowed down, then the decline in production at aging wells will provide a natural and fairly rapid reduction in production in General.

Us Agency Bloomberg reports that a meeting of the representative of the Texas Commission and OPEC negotiators is scheduled for June, although the Commission has influential skeptics: “One of the most powerful officials in the largest oil state in the United States was invited to the OPEC Holy of holies in June — (and it happened) as a result of a rare rapprochement between two historically antagonistic oil powers. On Friday, Texas railroad Commission Commissioner Ryan Sitton said that OPEC Secretary-General Mohammad Barkindo had invited him to attend the group’s summer meeting in Vienna. But even though the surprise announcement made a splash in the United States and international oil circles, Sitton’s proposal to restrict crude oil production in Texas ran into opposition from His own Agency for the first time since the 1970s. “Although I am open to any ideas to protect the “Texas miracle” (meaning “Texas economic miracle” based on “shale”. – Ed.), as a conservative and supporter of the free market, I have a number of reservations about this approach, ” said Wayne Christian, Chairman of the Commission. If Texas stops deliveries, there is no guarantee that other countries or even states will follow suit.”

This statement can be read in two registers, so to speak: on the one hand, there are votes against the Commission itself, and on the other hand, the opposition is not due to principles (despite statements about conservatism and market freedom), but to the fear of being cheated or being in the position of the only losers from the transaction. This is not a refusal, but rather a “set of reservations” that can be discussed in Vienna. It is significant that representatives of the regulator claim that they are already searching for and formulating specific measures (although they emphasize that no decisions have been made yet), referring to the fact that a request for consideration of this option was received from some oil companies. “Several Texas oil companies have asked about the feasibility of introducing production rationing by the Commission,” a representative of the regulator said. — The valuation is the exit “, each produces what he can or wants to each produces, how many will be allowed”.

This may seem strange, but so far the situation indicates that the sharp drop in prices is doing wonders in terms of the American oil sector’s compliance. It is far from certain that this miracle will be enough for the United States — at least informally — to join OPEC right now or to conclude (albeit informal) an international agreement on regulating production in the coming months, but there are already certain advances in this direction.

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