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Trump’s Energy Dominance Gives Way to Incoherence

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·4 min read
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(Bloomberg Opinion) -- The long arc of the American dream of energy independence, having recently soared Icarus-like toward energy dominance, has finally crashed ignominiously into energy incoherence.

Since early on in his term, President Donald Trump has boasted about U.S. fossil fuels giving him the whip hand. Yet there was a fatal flaw in his cunning plan: The domestic industries backing him weren’t quite up to the job. Coal policy has been one long exercise in white-boarding ways of forcing the market by fiat to take more of something it manifestly doesn’t want. With oil and gas, freedom fracks turned out to rest on the unconditional support of capital markets — and the latter now have some rather exacting conditions.

Hence, this week’s spectacle of Trump calling on Russian President Vladimir Putin to ease up on his oil price war with Saudi Arabia. Meanwhile, Pioneer Natural Resources Co. and Parsley Energy Inc. have written to the Texas Railroad Commission seeking an OPEC-style coordinated cut in oil production in order to preserve “U.S. energy independence,” which they say was a result of “private enterprise and innovation.”

There’s much to unpack there, but it’s crucial to take a moment to acknowledge one other development this week: Trump’s announcement of measures to gut the vehicle fuel-economy targets set by the previous administration.

Allow me to summarize: America is now so energy dominant that its president seeks favors from an adversary to help bail out domestic oil producers, while simultaneously rolling back policies that would reduce U.S. dependence on oil.

Think about another oil shock, the one in 1973 that scarred the baby boomers and sparked America’s independence fetish in the first place. That year, oil demand in the OECD countries outstripped their own supply by almost 27 million barrels a day. A decade later, that gap was just under 18 million a day. Where did those 8.9 million barrels a day go? Half of it was increased production as regions like the North Sea and Alaska really got going. But the other half was reduced demand; partly a function of recession but, more structurally, a concerted effort to stop using oil in power plants and make do with more efficient vehicles.

Given the call to the Kremlin this week, let’s add a geopolitical layer to this. Somehow, the U.S. survived and prospered after Saudi Arabia, among others, effectively turned off the oil taps in the 1970s. The following decade, the Soviet Union collapsed partly because it couldn’t handle Saudi Arabia opening the oil taps. The U.S. did well because it used its “private enterprise and innovation” — to borrow Pioneer’s and Parsley’s phrase — to diversify its energy options. The Soviet Union, never particularly famous for those attributes, remained addicted to oil, albeit as a hopeless dealer unable to weather a price drop for what it was pushing.

The frackers seeking political help are correct in observing that Covid-19 is an “extraordinary, unforeseeable crisis.” But just as Trump tries to give the coronavirus a Chinese passport to gloss over his administration’s shortcomings, the E&P industry seeks to blame its predicament entirely on external forces. Only last week, Scott Sheffield, Pioneer’s CEO, said in an interview with CNBC that the crash would leave only about 10 publicly traded U.S. oil producers with decent balance sheets versus dozens of “ghosts and zombies” carrying too much debt. That somehow didn’t make it into his letter on Monday, but it rather hints at an underlying problem in this business all of its own making.

Here’s a stab at a new approach. First, admit that the Covid-19 demand shock won’t be offset by a coordinated supply cut even if you could arrange it. A supply cut is coming anyway as storage space fills and prices crater. It will be painful, and the government should help the workers and communities affected most by this ( not highly paid CEOs). Second, recognize that the supposed leverage over foreign powers provided by fracking has evaporated along with the industry’s access to the high-yield bond market. The industry will survive, but it will have to restructure and cool its jets.

Finally, rather than debase America by horse-trading for an extra $5 on the price of oil (sorry, drivers, there are Texas’ electoral college votes to think about), how about using our technological edge to reduce dependence on oil in the first place? Then the country might be able to act with a bit more (what’s the word?) independence. Step one on that front: Don’t launch a war on efficiency standards that makes even some car manufacturers uneasy. Suggested slogan? “Energy intelligence” has a nice, if somewhat less macho, ring to it.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Liam Denning is a Bloomberg Opinion columnist covering energy, mining and commodities. He previously was editor of the Wall Street Journal's Heard on the Street column and wrote for the Financial Times' Lex column. He was also an investment banker.

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