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If Trump wants the Saudis to cut oil production, he must demand it

If Trump wants the Saudis to cut oil production, he must demand it
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The stock market’s precipitous fall when the coronavirus outbreak went global was unprecedented, and it slashed retirement accounts. At the same time, the oil markets have plummeted to record low prices because of the virus, demand fears and oversupply exacerbated by Saudi and Russian production policies. The U.S. shale oil producers, who have been bulwarks for our economy most years since the 2008 financial crisis, now face severe disruption.  

There is a need for prices to rise so our oil producers can profit once again, but policy must be wise. U.S. Energy Secretary Dan Brouillette recently said on Bloomberg TV that potential coordination between the U.S. and Saudi Arabia to cut oil production is an idea “floated around the policy space.” But this idea shouldn’t even be floated, and it should never be pursued.

Americans, especially politicians, are rightly proud of our free-market system that has made the country so prosperous. In truth, America’s economic system is not entirely a free market, because regulations and limiting legislation abound, including restrictions on the energy industry. During the Nixon administration, the U.S. even instituted price controls on the industry to stabilize gas prices. But it would be a hard sell for the Trump administration — which prides itself on deregulation — to forcibly limit the output from oil firms. While U.S. domestic production needs higher oil prices, it is wrong in our system to forcibly limit production from companies that need to create revenue. 

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Any deal in which the U.S. is required to decrease production almost definitely would face litigation from producers who would be required to make the cuts. The U.S. is not an autocracy like so many other oil-producing nations. In the U.S, businesses and their shareholders have rights and protections.

Logistically, production limits would be nearly impossible to monitor and enforce. Unlike countries such as Norway, Mexico and Brazil, the U.S. has no national oil company. Even though giants such as ExxonMobil and Chevron dominate the scene, the U.S. oil industry is exceptionally diverse, with many midsize and small producers contributing to America’s oil output. Some of the producers are as small as wildcatters with a single well. The government cannot suddenly institute an accurate tracking system. The Energy Information Administration issues production reports, but those are based on self-reported data and are not necessarily precise in real-time. Moreover, it would be impractical for the government to determine how much each producer can produce from a given field. There would be inequities that hurt some producers unfairly. Again, the U.S. government is not autocratic and has no way to enforce complete compliance. 

Any hypothetical production deal between the U.S. and Saudi Arabia also would bring severe market risks down the line. Such a deal eventually would have to come to an end. When it does, the market would express its disappointment and oil prices would fall. We just saw this play out in the extreme when a disagreement ruined the partnership between Russia and OPEC. That, coupled with Saudi actions and the coronavirus outbreak, has resulted in oil prices nearing the teens. A production deal involving the U.S. — if at all feasible in other ways — would necessarily lead to market disappointment in the future.

There are other options that the U.S. could use to try to pressure Saudi Arabia to scale back its oil production that don’t involve entangling alliances or production quotas for American companies. The Energy Department could allow the sale of nuclear power technology to Saudi Arabia in exchange for Saudi production cuts, or the State Department could offer further assistance with Saudi foreign policy or provisions for additional weapons purchases. However, this might not be enough incentive for Saudi Arabia to curtail its oil production and exports since Saudi Arabia can get access to nuclear power technology and nuclear power plants from Korea, France, China or Russia, and the U.S. already offers the Saudis plenty of weapons and foreign policy support. 

Perhaps the best approach the president could take, if he really wants Saudi Arabia to cut oil production and prop up oil prices, is for top personnel from the administration to get on the phone with the Saudis and demand it. Don’t make a deal; make a demand. There were reports that the U.S. might do this at an emergency virtual meeting of the G20 on Thursday, but there was no such outcome. The Saudi monarchy cherishes its relationship with the U.S. If the U.S. government really wants higher oil prices, the best way to get prices up is to make sure Saudi Arabia knows that relationship could be on the line.

Ellen R. Wald, Ph.D., is a senior fellow at the Atlantic Council's Global Energy Center and  president of Transversal Consulting, a global energy and geopolitics consultancy. She is the author of “Saudi, Inc.,” a history of Saudi Arabia’s Aramco. Follow her on Twitter @EnergzdEconomy.