Fine: Washington, D.C., on oil and gas

Daniel Fine
New Mexico Center for Energy Policy
Guest Editorial

The "deal" between the parties over the energy future of the United States and the San Juan Basin at the end of 2015 was the most misguided example of politics at the fuel pump since the 1970s. Then it was retail price control and now it’s a free-for-all in the price of oil in the world market with West Texas Crude approaching 10-year lows.

Lifting the restriction on exporting crude oil adds American oil to a world market which is over-supplied. Expect no cash flow increase for American producers and still lower world prices than with the restriction or ban in place.

This is not the place to assess the other side of the "deal." However, tax credit extensions for wind and solar as alternative fuels to replace coal and later natural gas are no longer of concern to the Republican Party in Congress.

With petroleum economics based on market prices, there is virtually no way that the "deal" will bring about tens of thousands of new jobs in the oil and gas fields. How does exporting crude oil lead to increased drilling and rig deployment if this increases supply in an oversupplied world market? On the contrary, it leads to lower prices and negative cash flows for producers who must cut their workforces.

If oil and gas prices rebound in the next three years, the alternative fuels are beneficiaries as tax credits shape new non-fossil fuel investment, offsetting the risk of lower oil and gas prices, This was no doubt the objective of the climate change politics of Paris and the Democratic Party in Congress as well as the White House.

Although U.S. oil refiners will have a transportation cost tax adjustment from the "deal," what prevents them from buying foreign oil at lower prices than American oil (North Sea Brent at declining prices)?

For more than a year, I have developed an analysis of an OPEC/Saudi Arabian price war against American shale or light tight oil producers. This was regarded lightly while industry and Wall Street funds held on for a price recovery by last June. Now what I wrote in these columns is "mainstream" and U.S. producers survive through selling forward with "hedges."

What will be left of the San Juan Basin oil and gas economy in 2017? Will exporting crude oil to Poland or Sweden, against Saudi discounts, contribute to a Four Corners economic rebound?

The advantages to American foreign policy of allowing Southwestern and North Dakota crude oil to be exported appear to be Washington, D.C., illusions. Will foreign buyers pay a premium price for oil because it is American? Why should foreign countries subsidize oil purchases from America in defiance of the market price?

At the end of the day, Southwest and Dakota producers will calculate a "net back" that will reveal the winners of the “deal" are the traders who dominate the foreign trade in crude oil with only one producing company exception.

The situation in the San Juan Basin and Four Corners is that this is unlike any "bust" on record since it couples falling natural gas and oil prices with Washington, D.C.'s climate change objectives to regulate fossil fuels out of existence in the next 15 years.

Daniel Fine is associate director, New Mexico Center for Energy Policy at New Mexico Tech, and project leader of the Energy Policy, state of New Mexico, Department of Energy Minerals and Natural Resources. The opinions he expresses in this column are his own.