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State Regulators Hold The Key To U.S. Participation In A Global Oil Supply Deal

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The energy media was filled with speculation on Friday and Saturday about how much higher crude prices might spike on Monday as OPEC and Russia prepared to hold an emergency conference call meeting that day. That speculation has now evaporated as the call has been postponed, now scheduled to take place on Thursday.

As the Wall Street Journal reported on Sunday, “Saudi Arabia and Russia have said privately they are unlikely to cut oil output unless North American producers join in.” While Canada has signaled its willingness to be a part of a larger, global approach to cutting supply, it is unclear how exactly officials from Russia and Saudi Arabia envision the United States joining the party.

I’ve written about this several times in the past, but it deserves repeating here: America is simply not like these other countries. It is called the “United States” for a reason. The federal government of the United States has no existing authority to just cause oil wells to be turned off and on at the snapping of a president’s fingers.

Yes, as we saw in the wake of the tragic Macondo blowout and spill in April, 2010, a president can declare an environmental emergency and cause all production to be shut in in the Gulf of Mexico. But beyond 3 miles of the coastline (roughly 12 miles offshore Texas) the Gulf of Mexico is a federal province. The order issued on May 27, 2010 by President Barack Obama to shut-in Gulf of Mexico production applied only in waters of 500 feet or more in depth, limiting it to areas safely within the federal province. In this way, he avoided challenges from state governors that would have certainly resulted had he attempted to shut down the entire Gulf, including all state waters.

This is what the United States calls “federalism,” and it is a concept that leaders in many other countries appear to have a very difficult time grasping. Given that the great preponderance of U.S. oil production comes mainly from beneath state and private lands, solving the conundrum of any U.S. participation in any global agreement to limit oil supply will necessarily involve participation from key state regulators.

In states like Texas, North Dakota, Oklahoma, Wyoming and New Mexico, which together are producing the preponderance of U.S. crude oil, regulatory bodies possess various authorities to limit production within their state borders. Those states combined to produce about 68% of the oil produced in the U.S. in January, the latest month for which the U.S. Energy Information has data. Another 15% was produced in federally-owned waters in the Gulf of Mexico and off the Pacific coast.

Thus, at least in theory, roughly 83% of U.S. oil production could be artificially limited by the federal government and state regulators on a coordinated basis. It is important to note that this kind of coordination is the only real way for the U.S. to become a meaningful part of any such deal.

Another aspect of U.S. law that leaders in many other nations have a difficult time grasping involves our country’s anti-trust laws. These laws make it a felony for corporations to band together as OPEC countries have banded together for more than half a century in any attempt to control prices for their commodities.

On several past occasions it has seemed as if Saudi Arabia and other OPEC nations labor under the belief that American oil producers can all just agree among themselves to artificially limit their production. But given that the vast majority of U.S. oil is produced by corporations, domestic producers would soon find themselves receiving subpoenas for documents and visits by FBI agents were they to make any effort to do that.

Because of this reality, regulatory bodies in the states mentioned above hold the key to any U.S. participation in some grand, global deal to limit oil supply. Not coincidentally, the Texas Railroad Commission, in response to a request by big Permian Basin producers Pioneer Natural Resources and Parsley Energy, will hold a hearing on April 14 in Austin to consider invoking its authority to limit well-by-well production in Texas. Given that Texas alone produced 42% of domestic U.S. crude oil in January, the decision reached at that time by that 3-person body suddenly assumes global importance. Should the Railroad Commissioners decided to limit production in Texas, we would likely see other state regulators move in the same direction.

If there really is to be a grand, worldwide bargain to limit crude supplies, those three Texas commissioners hold the key.



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