Making the Most of a New Era of American Energy
This year, the United States emerged from history’s biggest oil boom—this boom was more than an order of magnitude bigger than previous U.S. commodity booms and seven times bigger than the world’s biggest previous oil boom, which occurred in Saudi Arabia in the 1970s.
As a result, even with the 2020 oil bust, the U.S. produces more oil than any other nation. In 2019, America produced 65% more oil than #2 Saudi Arabia. And the U.S. is also the world’s biggest producer of natural gas and may soon be the world’s biggest exporter of liquefied natural gas. America is at the dawn of a new era as the world’s #1 energy producer.
My new line of research shows that, to maximize the benefit from this new bounty, oil & gas regulators should slightly slow production. Counterintuitively, slower production will benefit oil & gas companies by marginally increasing their cash flow and significantly increasing the long-term expected value of their assets. And slower production will also limit the environmental downsides of oil & gas and maximize the environmental benefits of natural gas.
Slower production counterintuitively helps oil & gas companies for two reasons.
First, although no individual company wants its production slowed, if companies were allowed to freely negotiate with each other, they would agree to cut back production simultaneously because slower production means higher prices and higher profits. As Adam Smith put it, “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in some contrivance to raise prices.” Antitrust law forbids them to negotiate a production slow down, because we usually prefer lower consumer prices. But oil & gas prices have been so low following the boom, sometimes even negative, that gas is just being wasted—flared off at thousands of wells across Texas and North Dakota. Regulators can stop this waste, which just harms consumers, by cutting back oil production. Modest production limits would also raise prices enough to increase overall cash flow to oil & gas companies immediately.
Second, oil and gas is a long-term asset, oil and gas that is wasted today could be worth a lot in the future. American oil & gas law pushes companies to drill and pump oil more rapidly than they would like—the rule of capture, common lease terms, and covenants implied into leases by the courts all make companies drill for oil when they would rather wait. But it makes no sense to rush to produce natural gas that will simply be flared, or to flood the market with oil at rock-bottom prices, when companies could simply wait to drill until prices recover. Modest production limits would somewhat mitigate the common law’s tendency to push more oil production than a truly free market would provide.
I explain these theoretical reasons for oil & gas production limits in my forthcoming Cardozo Law Review article, State Energy Cartels. I show how oil & gas production limits are actually an idea that came from the United States, and its oil producing states, during the Great Depression. And I show that production limits also have potentially massive environmental benefits: slowing carbon emissions, boosting renewable energy, and creating a counter-intuitive coalition of oil producing countries with a powerful interest in slowing fossil fuel production.
My own state of Texas will have to be a leader in negotiating any new coalition of oil producers to impose production limits. Because of the new oil boom, Texas now produces more oil than 12 of the 13 nations that comprise the Organization of Petroleum Exporting Countries (OPEC).
The Railroad Commission, Texas’s oil and gas regulator, has coordinated oil production limits before, as I explain in this EnergyTradeoffs.com podcast. In the years before and after World War II, Texas alone produced one quarter of the world’s oil and the United States together produced two-thirds. During these years, American oil powered recovery from economic catastrophe, victory in World War II, and the post-war global economic expansion. Texas played a leading role in limiting year-by-year oil production—so much so that when Middle Eastern countries moved to the forefront of oil production and formed OPEC, they described it as “a kind of international Texas Railroad Commission.”
My newest article, published in the Oil, Gas, & Energy Law Journal, shows how the Texas Railroad Commission can reclaim its mantle as the world’s leading oil & gas regulator and take initial steps toward cooperation on restraining production. I propose that it start by phasing in modest cuts in natural gas production to stop economic flaring and marginally raise oil and gas prices.
As I explain in this new Houston Chronicle op-ed, the Commission can improve its data collection to fine-tune its phase-in of new gas limits to ensure they boost industry cash-flow. I explain the economic and environmental benefits of this proposal at greater length in this recent video presentation on why it is the best method of stopping flaring, which is also embedded below.
The United States and Texas find themselves again at the center of global energy production. It is high time for them to carefully consider how they will maximize the economic and environmental benefits of this new bounty.