Five months ago, America’s oil and gas industry was in robust health.
At 12.5 million barrels per day, we were the No. 1 oil-producing nation. The same was true for natural gas, where we’d led the world for several years.
What is more, we’d become an important player in global energy markets. Since the ban was lifted in 2015, oil exports had grown exponentially, reaching nearly 3 million barrels per day at the end of 2019, or about 25 percent of domestic production.
Shipments of liquefied natural gas were departing the Gulf of Mexico and the Chesapeake Bay for Europe, Asia and South America. The Port of Corpus Christi (Texas), with $54 billion of capital investment in recent years, had become the nation’s largest energy export location and the third-largest port in the United States by tonnage.
Importantly, the benefits of America’s energy boom had spread to all regions of the country. According to the American Petroleum Institute, at the end of 2019 the oil and gas industry was supporting nearly 10 million jobs nationwide and was also adding workers faster than any other non-service sector of the economy.
Then, during the first quarter of 2020, the industry gets hit by the double whammy of a price war between OPEC and Russia combined with the COVID-19 pandemic that has effectively shut down the global economy. From $60 per barrel at the beginning of the year, the U.S. benchmark oil price has cratered to the low teens.
Domestic oil production is expected to decline by 3 million to 4 million barrels per day this year, while Asian and European companies are canceling orders for cargoes of American liquefied natural gas.
In recent weeks tens of thousands of layoffs have been announced by energy companies large and small, while the active rig count has dropped 50 percent to its lowest level since 1998. A growing number of operators have filed or pre-filed for bankruptcy, including Chesapeake Energy, one of the pioneers of the shale revolution.
So does this signal the end of American energy dominance? Will we revert to becoming a net energy importer? Should we consider policy interventions to “save” the oil and gas industry?
Oil and natural gas are not just commodities. They are the engines that drive America’s economy. As the United States has become energy dominant, thanks mainly to the shale revolution, we’ve altered the geopolitical landscape and no longer have to worry about supply disruptions from the Middle East or elsewhere, a reality that has vastly enhanced our economic and strategic security. So pursuing policies that can keep our domestic industry viable is paramount.
Otherwise, we may lose both the physical and human capital that has made us an energy superpower.
The industry is opposed to a bailout, though it may be worth extending the Payroll Protection Program or the Main Street Lending Program to independent petroleum companies so they’ll be ready to resume production when demand and prices recover.
We should also use this downtime to upgrade the infrastructure for transporting and processing oil and gas. For example, a lack of investment in pipelines has caused bottlenecks in both the Permian Basin and the Marcellus.
While global oil consumption is expected to flatten by the mid 2030s, the Energy Information Administration projects natural gas use to rise steadily — at least until 2050 — as the rest of the world follows the United States by substituting gas for coal in power generation.
Though some liquefied natural gas projects have been put on hold, due to demand destruction from COVID-19, the long-term outlook for natural gas remains bright. Demand is projected to reach 500 million tons per year within a decade, with Asia the leading customer.
This will require building additional trains and related infrastructure if U.S. producers wish to capture a growing share of that market. By streamlining and shortening the permitting processes for these facilities, we can help the U.S. become a dominate player in the global gas market.
It’s not all doom-and-gloom in America’s oil patch. Big companies will continue to invest during the down cycle, especially those with long-term projects such as deep-water drilling in the Gulf of Mexico where the payout period is typically decades instead of a few years.
Contrary to the hopes of some environmentalists, the COVID-related energy debacle does not signal the end of the fossil fuel era. The global economy will recover, as will the demand for oil and natural gas.
That’s why it’s important to take steps today to secure America’s No. 1 status in the years ahead.