By: Audrey C. Lovell
The current COVID-19 pandemic flipped the world upside-down and drastically altered the course of societal interactions. Working from home, staying indoors, and Facetiming loved ones instead of in-person visits appears to be the new norm.
During this time of great uncertainty, driving on nearly empty highways to brave the grocery store reveals two new truths. One, running errands can be considered “going out,” and two, gas prices have plummeted to shocking lows. Before this pandemic, cheap gas prices would have thrilled any motorist, but now cheap fuel bodes a strange new world with unknown significance. Oil trade analysts warn fallen prices signal “a major restructuring of the oil business” and this sharp descent is unlike any the world has seen.[i]
The effect of people adapting to the recommended way of living by obeying social distancing orders and working from home causes an extremely low demand for oil, ultimately resulting in over-production. However, merely stopping oil production is not a possibility; closing a well is costly so the more economical solution is to keep the oil pumping and sell it for cheap.[ii] While the oil keeps coming, “[t]here is simply nowhere physically to put all the oil when no one needs it.”[iii] An oversupply of oil combined with depleting, global demand is forcing oil companies to seek assistance.
Prices of oil started to drop when Saudi Arabia proclaimed in March it would be “ramping up production” and Russia followed suit.[iv] While Russia and Saudi Arabia increase oil production by 2 to 3 million barrels every day, the corresponding demand has dropped by “14 million barrels a day” with the estimated potential to further drop by approximately 26 million barrels.[v]
While several parts of the world, including the United States, plan to reduce oil production, there still exists a significant, global oversupply. Typically, a drop in gas prices would signal a boost in the economy, this drop, assuredly, is the stark opposite.
The oil sector is now reaching out to the U.S. Government for a life raft.[vi] A “hydraulic fracturing company” in Pennsylvania asked President Trump “to shield oil from market pressures and set a fixed price of…$62 a barrel, with commensurate tariffs on imports.”[vii] Oil company executives speculate the aftermath of the pandemic would send ripples through the oil industry once the demand for oil once again rose to normal levels.[viii] While the rest of the world will start to stand on its own two feet again, the oil industry may struggle to regain its footing. Several in the oil sector will have shuttered its doors due to the pandemic, but cars will begin lining up at the pump.[ix]
If the Government were to “bail out” the oil and gas industry, this wouldn’t be the first-time major corporations have been protected in a time of crisis. After the 2008 financial crash, GM, Ford, and Chrysler “asked Congress for $50 billion to stay afloat and prevent the loss of three million American manufacturing jobs.”[x] The U.S. Government filled this request, passing “an $80 billion bailout scheme.”[xi] The bailout seemed successful; the car industry improved and sales surpassed original predictions.[xii] Some analysts emphasize this bounce-back of the motor industry was likely akin to “natural market recovery”[xiii] but the bailout plan was likely a helping hand. Subsequently, the automotive job market benefited as “640,000 auto industry jobs since the bailout went into effect in early 2009.”[xiv] The question now becomes, in the shadow of the coronavirus, whether the towering oil giants should be the next to receive a helping hand in the form of a bailout.
In response to the COVID-19 pandemic, President Trump signed a stimulus package into effect in March 2020.[xv] The bill intended to aid the U.S. economy and American workforce by providing “checks [sent] directly to individuals and families, a major expansion of unemployment benefits, money for hard-hit hospitals and health care providers, financial assistance for small businesses and $500 billion in loans for distressed companies.”[xvi] Oil industry participants were left out of that stimulus package, but continue to push for Congressional aid.[xvii]
Before addressing the stimulus package, Congress debated whether to fill “the nation’s emergency reserve” after the nosedive in gas prices.[xviii] President Trump advised energy officials to buy oil to fill up the “Strategic Petroleum Reserve” which was “proposed by some oil lobbyists.”[xix] Since the 1970s, stockpiling oil serves as a method of crisis response and was utilized after emergencies like Hurricane Katrina.[xx] Filling the reserve to capacity now could alleviate the pressure building in the oil industry by providing a storage location for the surplus oil.[xxi] It wouldn’t fix the oversupply problem, but it would be a start.
Trump’s proposal to assist the oil and gas sector has not been warmly received; in fact, this proposal has been met with annoyed vitriol.[xxii] Why would the nation help out oil tycoons when the rest of the nation is on the verge of a recession with unemployment on the rise? Critics of the energy sector oppose helping out the oil industry and big corporations,[xxiii] but what if the real people helped by bailing out big oil were the smaller players?
Bailing out the oil industry feels unnatural but doing so could help out other facets of the country that are significantly affected by the oil industry. Cities in oil and energy industry-driven states are feeling the effects of the price drop, including citizens that have little to do with the energy sector. Significant impacts on the oil industry take a toll on cities that rely on oil to keep their economy running. For example, Houston, Texas is almost entirely impacted by “the oil and gas sector,” because municipalities like Houston are fueled by jobs that stem from “corporate, manufacturing, and services hubs” that flow from the energy sector.[xxiv] In Texas, 360,000 jobs derive from the “oil and gas sector and the service sector.”[xxv]
Additionally, boosting the oil and energy sector during the pandemic could positively impact clean energy initiatives. The ongoing drop in oil prices may stunt renewable energy investments because cheaper oil may “make renewables less attractive to some markets.”[xxvi] Cheaper oil will likely be more appealing to large-scale consumers rather than investing in renewable energy sources, which may come at a higher cost.
When the pandemic has passed and the coughs have settled, the world must return to the problems with which it was originally faced, such as climate change and renewable energy. Supporting the oil industry during this time seems counterintuitive, but it may ensure those original problems are still there when normalcy returns.
President Trump is contemplating whether to pay oil producers in the U.S. “to leave crude in the ground to help alleviate” the blow of the pandemic.[xxvii] This plan may be unsuccessful when proposed to Congress because implementation would require shelling out billions.[xxviii] The oil industry will likely still be reeling after the pandemic subsides; many smaller producers and fracking companies that critically support state economies could close. Despite the widespread critique, bailing out the American oil industry, to a certain extent, would likely protect the U.S. workforce and consumers in the long run. Once society shifts into normalcy post-pandemic, oil prices will rise while the national economy tries to find balance and the American workforce tries to find jobs. Filling the Strategic Petroleum Reserve can offer a supply of oil on American soil that could help the current oversupply issue and could ensure prices won’t rise too quickly for U.S. buyers in the future. Paying oil producers in the U.S. to keep crude in the ground could also stave the effects of the pandemic for a little longer by reducing the oil oversupply.
Critics balk at the idea of helping the oil industry during this time of crisis. These industry giants essentially control the world’s economy—how could we cut them a check when the American workforce is losing their paychecks? However, looking at cities like Houston that depend on a thriving energy sector shows there may not be another option. The man behind the curtain isn’t always the great and powerful oil tycoon, but often it’s the people just trying to keep the Emerald City glowing.
[i] Will England, Cheap oil doesn’t mean much when no one’s going anywhere: Coronavirus will reshape the oil industry, The Washington Post (Mar. 31, 2020, 6:00 AM), https://www.washingtonpost.com/business/2020/03/31/cheap-oil-doesnt-mean-much-when-no-ones-going-anywhere-coronavirus-will-reshape-oil-industry/ [https://perma.cc/VS5A-SWQ6].
[ii] Id.
[iii] Id.
[iv] Id.
[v] Id.
[vi] See id.
[vii] Id.
[viii] Id.
[ix] Id.
[x] A Reflection on the 2009 American Auto Bailout, Public Policy Initiative, Wharton: University of Pennsylvania (Mar. 22, 2017), https://publicpolicy.wharton.upenn.edu/live/news/1779-a-reflection-on-the-2009-american-auto-bailout [https://perma.cc/CNC7-FK62].
[xi] Id.
[xii] Id.
[xiii] Id.
[xiv] Id.
[xv] Clare Foran, et al., Trump signs historic $2 trillion stimulus after Congress passes it Friday, CNN (Mar. 27, 2020, 7:00 AM), https://www.cnn.com/2020/03/27/politics/coronavirus-stimulus-house-vote/index.html [https://perma.cc/Y4VR-LLWE].
[xvi] Id.
[xvii] Dino Grandoni, The Energy 202: Struggling U.S. oil companies hope for more economic help in next coronavirus stimulus package, The Washington Post (Mar. 30, 2020), https://www.washingtonpost.com/news/powerpost/paloma/the-energy-202/2020/03/30/the-energy-202-struggling-u-s-oil-companies-hope-for-more-economic-help-in-next-coronavirus-stimulus-package/5e80ea8c88e0fa101a755313/ [https://perma.cc/4YTM-XTJJ].
[xviii] Stephen Cunningham, et al., Trump to Fill U.S. Strategic Petroleum Reserve “to the very top,” World Oil (Mar. 14, 2020), https://www.worldoil.com/news/2020/3/13/trump-to-fill-us-strategic-petroleum-reserve-to-the-very-top [https://perma.cc/LHX4-Z86Y].
[xix] Id.
[xx] Id.
[xxi] Id.
[xxii] Jonathan Chait, Trump Wants Coronavirus Bailout for Oil and Hotel Industries, New York Magazine (Mar. 10, 2020), https://nymag.com/intelligencer/2020/03/trump-coronavirus-bailout-oil-hotel-industry-stimulus-recession.html [https://perma.cc/JS4J-MZHY].
[xxiii] Bill McKibben, If We’re Bailing Out Corporations, They Should Bail Out the Planet, The New Yorker (Mar. 20, 2020), https://www.newyorker.com/news/daily-comment/if-were-bailing-out-corporations-they-should-bail-out-the-planet [https://perma.cc/8RAP-ABNA].
[xxiv] Katherine Dunn, For boom-bust oil towns, coronavirus is a very different kind of crisis, Fortune (Apr. 5, 2020, 8:00 AM), https://fortune.com/2020/04/05/oil-prices-oil-cities-coronavirus-crash/ [https://perma.cc/85BQ-KRNV].
[xxv] Tyler Clifford, Parsley Energy CEO says Texas must cut oil production, which hasn’t happened since the 1970s, CNBC (Apr. 15, 2020, 6:49 PM), https://www.cnbc.com/2020/04/15/parsley-ceo-texas-must-cut-oil-production-or-jeopardize-domestic-crude.html [https://perma.cc/W9DL-D62J].
[xxvi] Anmar Frangoul, The coronavirus is hitting renewable energy supply chains and factories, and could slow the global energy transition, CNBC(Apr. 6, 2020, 10:29 AM), https://www.cnbc.com/2020/04/06/the-coronavirus-is-hitting-renewable-energy-supply-chains-factories.html [https://perma.cc/YU7P-3X7A].
[xxvii] Jennifer A. Dlouhy & Sheela Tobben, U.S. Weighs Paying Drillers to Leave Oil in Ground Amid Glut, Bloomberg (Apr. 15, 2020 5:19 PM), https://www.bloomberg.com/news/articles/2020-04-15/u-s-weighs-paying-drillers-to-leave-oil-in-the-ground-amid-glut?sref=h5EZFUoq [https://perma.cc/H9FV-547K].
[xxviii] Id.