Historic Oil Price Crash Highlights Holes in U.S. Energy Security

U.S. oil prices went into negative territory for the first time last Monday, underscoring the extent to which the oil market is oversupplied. The price rout indicates that more pain lies in store for U.S. oil producers, who have already been badly affected by the coronavirus-induced downturn in demand.

Prices for May delivery of West Texas Intermediate (WTI), the U.S. benchmark, hit as low as negative $40.32 per barrel on April 20 before settling for the day at negative $37.63, meaning producers would have to pay buyers to take the product. While initially only prices for May were affected, prices for June delivery dropped as well, though they have since recouped some of their losses. Brent crude, the global oil benchmark price, also slid last week, hitting a 20-year low before recovering slightly.

By necessitating lockdowns and halting economic activity, the coronavirus pandemic has shattered global demand for oil. Almost simultaneously, a Saudi-Russian oil price war last month led Riyadh to unleash a flood of cheap crude on an already-glutted market, further destabilizing the situation and badly hurting U.S. shale oil producers in the process. As prices fell in response to the Saudi salvo, several U.S. producers announced cutbacks in planned capital expenditures, while one has already filed for bankruptcy. Many more are almost certain to follow. While President Donald Trump succeeded in getting the Saudis and Russians, along with other members of the Organization of Petroleum Exporting Countries (OPEC) and some non-OPEC states, to finalize an April 12 deal to cut production by 9.7 million barrels per day, the new agreement does not take effect until May. Even then, however, the prescribed cuts will not begin to rebalance a market in which demand has fallen by as much as 30 million barrels per day.

Faced with the dual challenge of a supply glut and a downturn in demand, U.S. producers now have few options besides storing their crude. But storage capacity in the United States is quickly running out, with tanks at the main storage terminal in Cushing, Oklahoma, fully leased out. Indeed, fear over shrinking storage was the main instigator behind last Monday’s price crash.

At least two implications of the WTI price crash merit mention. First, U.S. oil producers will need to consider a production cut. A coordinated production cut has not occurred in the United States in several decades. The Texas Railroad Commission, which oversees oil and gas production in that state, has so far refused to endorse a cut, despite some Texas producers asking the Commission to do so. U.S. production has dropped by 900,000 barrels per day in the last month, but overall production remains around 12.2 million barrels a day.

A second important implication of the WTI price rout is more salient for Washington, given Trump’s much-vaunted claims of U.S. “energy dominance.” The price collapse further underscores how far away from energy independence the United States really is. The United States may be more self-sufficient in oil production (though in 2019 the country still had to import more than 6 million barrels of crude per day), but that still leaves U.S. producers enmeshed in the dynamics of a vulnerable global oil market, one in which autocrats and dictators hold significant sway and often act in ways adverse to U.S. interests. To attain true energy security, Washington needs a concerted, long-term strategy that prioritizes investments in renewable energies and alternative fuels, which would limit the country’s reliance on oil.

Varsha Koduvayur is a senior research analyst focusing on the Gulf at the Foundation for Defense of Democracies (FDD), where she also contributes to FDD’s Center on Economic and Financial Power (CEFP). For more analysis from Varsha and CEFP, please subscribe HERE. Follow Varsha on Twitter @varshakoduvayur. Follow FDD on Twitter @FDD and @FDD_CEFP. FDD is a Washington, DC-based, nonpartisan research institute focusing on national security and foreign policy.