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March 16, 2022

US Policy Enables and Encourages Monopoly Behavior by Major Oil Companies

Only independent producers will bring prices down.

The Competition Problem

Producers of commodity products have a problem they’ve had ever since capitalism was invented and probably before. It’s called competition and they don’t like it. Competition forces prices and profits down; that’s good for consumers but bad for producers. The classic answer to the competition problem is monopoly. If monopoly is not possible, then collusion to keep prices high and under-supply the market is the next best choice. But such collusion is a violation of anti-trust law in the US. Moreover, if prices are too high for too long, competitors will be able to raise capital to crash the monopoly market. The price of international phone calls went from dollars to pennies per minute in a few short years at the end of the 20th century when the internet enabled new companies to crash the international phone cartel.

The oil business has long “suffered” from competition. Demand for fuel soars. Drilling increases everywhere at once. Once all the new wells are pumping; there’s more fuel than the market needs; and prices come crashing down. A well that was drilled to produce oil profitably which can be sold for $80/barrel is underwater at $60. Whoops, time to write down all those assets. Wall Street hates write-downs; there goes the stock price; can’t even pay big bonuses. What’s worse from an oil-company PoV is that those uneconomical wells keep producing even if the original drillers go bankrupt since the people who bought them out of bankruptcy paid pennies on the dollar. It takes a long, long time for prices to go back up.

Fracking to the Rescue

You think “environmentalists” are the only ones who hate fracking? Think again. It was small independent producers who implemented fracking. First they bought the price of US natural gas down by 80%. Next they brought the price of US oil down from over $120/barrel to less than $30. All of a sudden the gas and oil in the ground which the major oil companies controlled was worth only a fraction of what their books showed. Major write-downs. Major discomfort. Not only western oil companies were hurt. Russia had to be bailed out from near bankruptcy as the price of its oil went below the cost of production (ironically helping bring Putin to power). Saudi Arabia was imperiled by the Arab Spring just when it was running out of petro dollars to buy off its citizens.

Finally the majors had to frack themselves to stay in business. Their investors complained that they spent too much on drilling and were never able to harvest enough profit. Their CEOs promised to “act responsibly” meaning they would drill less and charge more. But, every time the price of oil and gas, picked up, those pesky independents raised some more capital, picked up their drilling rigs where they’d laid them down, even bought new rigs, and down came prices. Damn!

Paint my Monopoly Green

However, a new-found love for environmentalism gave the majors the cover they needed to cut production. They couldn’t conspire legally (and probably didn’t) to stop investing in new production; but they could legally announce where all their competitors could see it that they were cutting development of new wells to save the world. Lack of new production makes all the land and all the leases they hold even more valuable – even if they don’t drill there currently. But what about the pesky independents; won’t they just come back and crash the market again?

Government to the Rescue – of whom?

Not if our government can help it. We’ve used the Securities and Exchange Commission and banking regulation to discourage investment in fossil fuels. In practice that only hurts the independents who have to raise money to start drilling. The majors are awash in cash and they don’t want to drill much anyway. We’ve slow-rolled leasing on public lands. The independents drill new leases as fast as they can; they’ve got to have a cash return on their capital. The majors – as Biden pointed out - sit on their leases content to have the assets appreciate untapped. We’ve stopped pipelines which could move oil and gas more efficiently or open new areas for drilling or give more Americans the benefit of cheaper energy. We’ve effectively capped opportunity for those who could now bring us lower energy prices, help rescue our allies from their unwise dependence on Russia, and drive that country back into the bankrupt hole that Putin crawled out of.

Many people sincerely believed that outsourcing fossil fuel production to Russia, Iran, and Saudi Arabia helped the environment. The major oil companies rode this vulnerability as they postured green. Meanwhile, since they were spared investing in the west, they invested in Russia (did you notice them recently saying they were going to stop this investment?). Oil and gas produced in the US is a hell of a lot cleaner than oil and gas produced elsewhere. Would you want to be the one to tell Putin that production has to be cut to avoid fugitive methane emissions? War has a terrible carbon footprint and Russia’s war in Ukraine is bought and paid for by petro dollars.

Unleash the Independents

None of this has to do with whether carbon-free energy should be substituted for fossil fuels whenever that can actually be done at a price people can afford. But we need to have the carbon-free energy and the means to deliver it BEFORE we give up our own fossil fuel production. That’s become painfully clear.

We can bring supply up and prices down this year by unleasing the independents. We don’t have to subsidize them; they’ll be able to raise investment dollars once our government stops discouraging investment. We don’t want a windfall profits tax, even though the majors deserve it, because we need to bring some more expensive supply online quickly. The independents, once allowed to drill again, will keep the profits of the majors down. We should regulate old and new drilling to control fugitive emissions – but can’t let regulation be used by those who want to ban drilling altogether or to preserve their monopolies to stop the independents from providing us the energy the world needs.

I’ve been around the oil and gas patches a bit in the last decade. The independents are cowboys and cowgirls; they’re not politically correct; some spit on the ground. They need to be watched environmentally. Many of them have gone bankrupt and many will go bankrupt again; but they’re not too big to fail and shouldn’t get bailouts. Once more, we in the west need the cowperson spirit.

We can do this!

See also:

Defeating Putin Requires Winning the Energy War

High Oil and Gas Prices Fuel Russian and Iranian Aggressiveness

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