The Texas Railroad Commission, which oversees oil production in Texas, has proposed a 20% reduction in oil production. This proposal is being objected to by larger oil producers, such as Exxon.
The OPEC/OPEC+ meeting last week resulted in an agreement that totaled a reduction of 9.7 million barrels per day (bpd) between all members combined.
Oil production in Texas accounts for roughly 4 million bpd, so a 20% reduction would be 80,000 barrels.
However, due to economic pressures and the expense of shale oil drilling being so high, shale oil producers across the country are projecting a reduction in oil production of 1.59 million bpd.
“The latest data from the EIA’s Drilling Productivity Report sees widespread production declines across all major shale basins in the country. The Permian is set to lose 76,000 bpd between April and May, with declines also evident in the Eagle Ford (-35,000 bpd), the Bakken (-28,000 bpd), the Anadarko (-21,000 bpd) and the Niobrara (-20,000 bpd).” Oilprice.com
This is a total reduction in agreed oil production globally of 9.7+1.59 million bpd= 11.29 million bpd.
Considering that oil demand has declined by at least 25 million bpd, this leaves a projected oil production surplus of 13.71 million bpd. Oil storage in the US is reaching capacity and may reach that capacity within 2 months. Which will mean a screeching halt to oil production at least in some regions very soon.
Some oil traders have been buying oil at low market prices and leasing Very Large Crude Carriers (VLCC) to park offshore in expectation that oil prices will rise, at which time they would sell that oil at a profit. Unfortunately for them, carriers have seen such a demand increase for vessel use that they have increased lease prices to as high as $200,000 a day. That rate may increase if the practice continues. Plus with an oil surplus being ongoing, once storage reaches capacity, oil prices may plummet even further.
It is difficult to assess realistic projections for near future oil demands globally. China appears to be lifting their quarantine slowly, as do other countries. However, more than one country has lifted restrictions, only to see pandemic infection rates skyrocket and then imposing even greater restrictions. In the US, restrictions and closures of manufacturing/processing plants (like Smithfield) are resulting in less oil and gas demand, which we can expect to continue declining for some weeks or even months to come.
If oil demand continues declining further, then oil/gas prices will continue to decline as well in spite of production decreases.
One factor has caused a slight increase in oil/gas prices, which is that Saudi Arabia has increased to price of oil sold to the US, while maintaining low prices to other markets. This narrows the cost between imported oil and shale production but the actual cost of shale production remains higher than imported oil. The lower price offered to other countries forces US producers to compete on price points, leading them to operate at an even greater loss.
I have brought up the point before that US oil producers are operating at a continuous loss, causing them to require government subsidies and loans, driving them deeper into debt. Smaller oil producers and lesser producing fields are being shuttered completely or production reduced to a trickle.
My biggest objection to all of this is that the US oil companies operating with subsidies and loans are doing so with currency created from thin air, which devalues the dollar. (Or will do so eventually.) This is not being done as claimed for energy security but for large corporations to sell even more oil at a loss to other countries, only for the sake of profits to stock shareholders. This is happening as we are in a crisis where millions of Americans have lost health insurance and income. The same amount of money is not being created for their well-being. There are no highly publicized and debated Congressional bills being reported to bail out the oil industry. Human beings can starve or die but our government will bail out rich investors.
Here is something completely hypothetical. The reports we hear are that Saudi Arabia is ending support for the war in Yemen because so many of the royal family have the pandemic. That sounds unlikely. More likely they have decided it’s not worth the financial cost while supporting the oil industry operating at a loss. This means they will be buying fewer weapons from the US.
So, what would happen if they ultimately reach a diplomatic arrangement with other ME countries?
The petrodollar was instituted while US oil production was considerably lower. Now we have overtaken them as the global exporter of oil. In retaliation, there is literally nothing stopping them from doubling the price of oil sold to the US but not other nations. Of course, this would result in the US refusing to buy Saudi oil. Yet it would then mandate all domestically produced oil to be sold domestically.
End result- They stop buying our weapons, we stop buying their oil. The agreement which formed the entire basis of the petrodollar system becomes null and void. The Saudis would then be free to sell oil in currencies other than the dollar, along with a growing number of other countries. Nations around the world see this and begin selling off US Treasury bonds in mass numbers. The petrodollar collapses, causing devaluation of the dollar. The US experiences hyperinflation. Unable to sell, unable to borrow, the US would be unable to continue funding wars around the planet.
Maybe it’s my own fantasy but I think it’s a very good one. After all, the only way we will build a system based on anything besides oligarchic rule and warfare is when those systems are disabled entirely. This is a scenario which is entirely plausible and could happen in the near future. Saudi Arabia never agreed to take second or even third place to the US on oil sales globally. We don’t have to question whether they are unhappy with our competition. They are very unhappy. They also have no remaining viable need for our weapons, as no neighboring country can mount a viable threat to them, especially if they make peaceful overtures. Their only other competition is Russia, who has stated they will maintain current oil production but not increase oil production. Both are members of OPEC/OPEC+, which the US is not.
So, I am allowed my fantasies. Like I said, they are plausible, if not entirely realistic. Maybe.