Real Clear Energy recently published an op-ed by former administrator of the U.S. Energy Information Administration Guy Caruso on the resilience of the American energy industry. Media coverage of the coronavirus-driven recession and the OPEC-Russia oil war has portrayed both as existential threats to American oil producers. Caruso argues that while these problems are not insignificant, they are far from insurmountable.
Caruso refutes several of the common claims made by energy doomsayers. The first is the notion that the coronavirus has exposed complex structural deficiencies in the U.S. oil industry. Caruso finds little evidence of this. He writes:
“Fortunately for American oil producers, the root cause here is largely singular … The current glut does not reflect a longer systemic problem such as an unfriendly regulatory environment or any other more permanent obstacle to success.”
Anticipating that critics of his analysis might retreat to arguments about oil price susceptibility to foreign manipulation, Caruso demonstrates that the current situation reveals the vulnerability of the American oil industry’s chief competitors.
“Skeptics would be correct to point out that OPEC and Russia’s decision to engage in a price war in the midst of this viral crisis is largely responsible for the magnitude of the price drop. However, they would be wrong to interpret that choice as a sign of unassailable market dominance.If anything, it exposes weakness. … Russia’s recalcitrance to cut supply, even at the cost of alienating an ally, is proof of the threat posed by the growing US energy industry.”
Caruso shows that the price war is a unsustainable attempt to reduce investment in American oil and force producers to shut down by highlighting the discrepancy between short term political tactics and long term economic reality.
“Cutting oil prices is a tactical move that stunts the growth of the US energy industry in the short term. However, it isn’t a credible strategic threat in the long term because the success of the American economy is far less dependent on oil prices than its antagonists.”
Caruso argues that unless Russia and Saudi Arabia’s scare tactics succeed in eroding investor confidence, the U.S. oil industry will not only survive the current crisis but will be well-positioned for substantial expansion in its aftermath. He concludes:
“For American investors and producers, a steady hand in the face of uncertainty may be rewarded with a more robust domestic oil industry, greater energy security, and enhanced negotiating power. Yielding now would amount to a missed opportunity to subvert the strategies of vulnerable energy adversaries.”