Oil Proration: Not the Solution

A global drop in energy demand amidst the coronavirus outbreak, a crisis magnified by the Saudi-Russian oil war, has left American energy producers reeling. Now, some industry leaders are in support of government-mandated production cuts as a tool to prevent crude prices from tumbling even further.

In an op-ed published in The Oklahoman, GAIN Strategic Advisor and former Oklahoma Corporation Commission Chairman Patrice Douglas explains why forced proration would cause more harm than good.

Despite the urgency of the current crisis, now is not the time for government to impose constraints on private companies that are already under significant external pressure. Doing so would only prevent producers from making the decisions that are best for them, increasing the risk of bankruptcy and subsequent job loss. Douglas states:

“Limiting oil production at a time when economic investment is needed most is a dangerous example of government overreach that will only punish the hardworking men and women of the industry.”

Proration supporters assume that companies will not adapt to the crisis unless their hand is forced. In reality, government-mandated production cuts would make companies react less efficiently than they already have. Douglas writes:

“The industry has already taken proactive measures to weather the storm through internal restructuring and curbing production on their own where necessary. The oil industry cut more than 50,000 jobs just last month.”

To be successful, proration would have to be implemented equally worldwide. Those in favor of statewide production cuts are mistaken if they believe that outside competitors would not take advantage of other’s self-imposed restrictions. Douglas explains:

“If the RRC and OCC were to implement proration, it is important to keep in mind that Texas and Oklahoma do not operate in a vacuum, and without similar regulation in other high-producing states and countries, Oklahomans and Texas will disproportionately pay the price.

Given the impossibility of international compliance, states like Oklahoma and Texas stand to lose from proration. Instead of forcing American producers to surrender market share to energy adversaries like Russia and Saudi Arabia, government should look for ways to support the energy industry without leading it off a cliff. Douglas concludes:

“In order to maintain American energy dominance and Oklahoma’s role in meeting our nation’s energy needs when the coronavirus subsides, now is not the time shut in our resources. There is too much at stake to gamble with the bedrock of our state’s economy when we need it most.”