The US government did not intervene to reduce oil production because public financing capacity for corporate finance was too low. Consequences of growth by debt …
The plan to reduce oil production in Texas has failed
Ryan Sitton, one of the three executive members of the Texas Railroad Commission (RRC), which regulates Texas oil production, said it had abandoned the proposed 20% reduction in the state’s crude oil production because it was unable to support from the remaining members, according to Reuters.
Sitton commented: Over the past ten years we have witnessed a wave of supply exceeding demand in the global oil market, as oil demand is forecast to increase continuously. However, we have never seen supply exceed demand as large as it is today.
As a result, an excess of 1 billion to 1.5 billion barrels of oil will hit the market in the coming months, far exceeding storage in the world. This will push oil prices to their lowest levels, forcing producers to reduce production or even shut down operations.
The world needs Saudi Arabia and Russia to help prevent market collapse. And they did. Now is the time for our leadership to join the discussion to prevent a protracted oil war. We need to have something specific to discuss.
|Texas Railroad Commissioner Ryan Sitton failed to propose a US oil production cut|
To give the United States something specific to discuss with the world about oil, the Texas Railroad Commission, which regulates oil production in the state, set up a production cut schedule for Texas oil producers.
Theoretically, Texas could reduce production by 10%, if Saudi Arabia is willing to cut production by 10% before the Covid-19 pandemic and Russia will do the same. This will bring the market to the situation before the current oil crisis.
In fact, this is an action that Texas decides its own destiny, not helping anyone. Therefore, we need the support of the Federal Government and the President of RRC to implement the agreement to stabilize the oil market.
I know this is a sign of state intervention in the free market. But other governments have done that, so “why don’t our government step in to try and revitalize a new approach to the market?”.
It is known that Texas is the largest crude oil exploitation state in the United States with about 5.4 million barrels / day, equivalent to about 41% of the country’s total output. Mr. Sitton urged RRC members to consider and support the proposal of reducing 1 million barrels a day.
In case this proposal is approved, it will be the first time in 50 years that Texas will reduce production. However, one day before voting, Mr. Sitton canceled the proposal.
“This idea has failed. We should have taken action six weeks ago. At the present time it is no longer working. We have no consensus among the three executive members to make it happen.” chemical ideas “.
Earlier, RRC President Wayne Christian said she would oppose the proposal to reduce production. “I still don’t know who this idea is in favor of. The market is still adjusting without the intervention of authorities.”
Meanwhile, Texas Energy Association Vice President Karr Ingham said that by the end of May, Texas production could be reduced by 20%, even though Ryan Sitton’s proposal was not approved.
Why is the United States refusing to cut oil production?
The public was skeptical about the reason for respecting the free market that the proposal of Texas Railroad Commissioner Ryan Sitton, was rejected, while American shale companies, from large to small scale. , are uneasy because of overproduction.
Analysts say that the idea of Mr. Sitton not supported is not simply the government’s avoidance of market intervention, but it is in the interests of the US shale oil industry and the world. American business, derived from this idea.
|The United States cannot cut output as oil prices rebound|
first, The US shale industry and the US energy industry tycoons will benefit the most, as quickly as oil prices recover, but this will not be achieved if the idea of cutting production is supported by the government.
Currently, US oil tanks are almost full, which means that the amount of floor oil that is exported must be export-oriented. When the price of oil recovers, as an exporter, the United States naturally benefits.
Therefore, if production is cut, the amount of exported oil will decrease. If the export is guaranteed, cheap oil must be stored for domestic demand for export. In any case, the benefits of the US shale industry will diminish.
Thus, if cut production, the US energy industry tycoons must sacrifice benefits and of course must be compensated. Given the current difficulties, the US government will certainly not intervene in reducing production, then seek to compensate the tycoons.
Clearly, Washington would rather accept the role of a derivative entity in the global oil market so that American shale oil benefits from the decisions and actions of the major actors, which Russia now, Saudi Arabia and OPEC +.
Monday, the debt balance of US businesses operating in the oil sector is so imbalanced that the US government does not dare to take risks in favor of reducing output, meaning reducing production, creating the risk of increasing the wave. bankrupt.
Just looking at the case of “giant” Occidental Petroleum is struggling to cope with the financial storm is immediately that the US government’s support for the plan to reduce the floor will be extremely risky.
Occidental Petroleum Group, in its financial report released May 5, showed that it had made a huge loss in the first quarter of 2020 and had to cut its third spending plan only in 2 months.
Occidental Petroleum struggled with the liabilities and expenses incurred from the $ 38 billion acquisition of Anadarko Petroleum last year, a historic M&A deal in the US shale industry before the market plummeted. .
“Occidental Petroleum reported a net loss of US $ 2.23 billion, or US $ 2.49 per share, in the first quarter of 2020, while the same period last year, the group made a profit of US $ 631 million, equivalent to 84 cents per share, “reported Reuters.
It is worth mentioning that the purchase of Anadarko caused a debt of 40 billion USD for Occidental and the collapse of oil price did not necessarily bring this giant corporation into a crisis like today, but the problem lies in the arising expenses, in which especially interest.
This is the result of Occidental as well as the oil industry businesses – and the US business system too – whose loan balance ratios are too imbalanced, stemming from being encouraged by the lending policy. unlimited.
|Large debt is always the death of American business|
That makes the coefficient: Loan / Owner’s equity, of US businesses always exceed safety threshold. Therefore, the interest rate always accounts for a large proportion in the price, and the interest rate is always constant. So when the price of oil plummeted, American businesses stood out.
Another issue worth mentioning is the intangible value of American businesses is always very large, so when “barometer of economy“There are fluctuations in the negative direction that US businesses can immediately lose their ability to handle financially.
It is most evident that the value of an enterprise’s assets to be transferred or mortgaged is often very small compared to the total listed value. This is the main reason why US businesses cannot access the Fed credit.
Finally, only rely on the government. When oil prices recover, increasing output is an opportunity for US shale oil business to overcome the best financial storm. Therefore, the US government will not interfere with the production cut of businesses.
In short, the US government’s inability to support a reduction in oil production is due to the low ability of public finance to support US corporate finance. This is the result of a growth policy based on increasing public debt of the current US government.