Dear President Trump,
I voted for you and I'm voting for you again. I like what you're doing with our country. I like too that you like me. I say that because I'm a fracker and you seem to like frackers. We like you too. Because of our solid relationship, I feel I can be impertinent, even obnoxious, and suggest that you take a few moments out of your extremely tight schedule and entirely remake the oil world at your earliest possible convenience.
Please keep applying all your efforts to the Coronavirus. Don't stop any of your momentum there. The oil and gas industry can wait. We're used to supply and demand-side disruptions. We've grown accustomed to working without a net. In fact, it's no secret that we are masters of pandemics-at creating our own that is. But once you are ready for us, we will be unconditionally ready for you.
The demand side destruction now taking place is huge, bigger I think than what most analysts are forecasting; maybe something as high as 20 to 25 million barrels of oil a day in a previously balanced 100 million a day market. The supply-side destruction about to take place is going to add to the problem, but it will be small relative to the demand side. The Saudi's are thumping their chests but the truth is they can only add a few million barrels of oil per day. Under normal circumstances, that's a market changer. But these days, when compared to the demand destruction, it's only a drop in the bucket. Collectively, though, we are in for a real stomping. Inventories are going to spill over into unheard of prices. We're going to wish for those halcyon days of $25 oil. It's coming. There's no stopping it, and with it will come the unraveling of one of the centerpieces of your platform, sir, an energy-independent America. Many in your administration will ask you to appeal to the reasonable side of the Saudi's. They will tell you to make a deal, give something away, turn your head. Please don't. If you must, sneak off for a well-deserved round of golf when them Ivy Leaguers who have been writing US policy for the last few centuries start lining up with advice. They will be in smart suits carrying satchels filled with mission statements on how to preserve our relationship with the Middle East. Let's duck those meetings.
Related: What Happens If U.S. Shale Goes Bust? Rather, obnoxiously, I would suggest, you give some consideration to the possibility that there is no reasonable side to the Saudi's-not as it would pertain to our interests. There's no talking to the Russians either, but their excess capacity is measly when put up against the Saudi's, so why bother? Backchannel negotiations aren't going to do much either. You'll just be breathing life into dead and outdated ideas, like the foreign policy of countless administrations before yours. Instead, why don't you reinvent American's energy policy and its relationship with all of the oil-exporting countries? I ask you to do something completely different because you are completely different. You do the unthought of. I like that about you. A lot of people do.
As a fellow free-market advocate, what I'm suggesting may sound treasonous, but only because it is. What I'm saying is you need to fix the price of oil, maybe basin by basin, or one price for all. Set it at $62/bbl if one price for all. All imported oil would be subject to a tariff. This includes all the Sulphur-rich, low-quality oil the Saudi's are sending into their state-owned Motiva refinery in Port Arthur, Texas, along with all the other heavy crudes shipped into our ports. Of course, they're going to cry and moan, but so do my kids when I tell them no more TV.
Now, this is putting a simpleton's spin on it, but no bailout money would be required for the US oil and gas sector, plus you'd be sitting on those tariff dollars. Use them as you see fit, but I would argue against stuffing oil tariffs into a general fund. My treasonous thinking has you allocating some of it to wind and solar development. I would also push some into nuclear and would rewrite the rules there so plants can be built quickly, efficiently and safely. Oil and gas alone cannot meet all of our needs, not with decline curves and high-graded shale getting in the way, not to mention the time to bring on new offshore development. So, include renewables.
Odd things may happen to your presidency when embracing all forms of energy. You may find some of the green energy crowd coming along with you. But you won't get them all; not the militants anyways. They tend to be a strong-willed, loud-mouthed bunch not fond of compromise. Nevertheless, with such an all-encompassing, all of the above approach-heavy on natural gas-and light on stupidity (think farting cows)-you just might win over enough of them to win over the House.
To clean up our air, I would also create tax incentives for refiners along the Gulf Coast to retool for lighter grades of shale oil. It's cleaner and it's right there, not half a world away. That way, we won't have to overlook the heavy Venezuelan crudes shipped to Citgo's three Gulf Coast refineries. Citgo is owned by Venezuela. Their refineries would have to retool as well (hello, EPA!) and start running lighter, cleaner crudes. Venezuela doesn't have lighter cleaner crudes, but we do.
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Think of it, you'd be able to kiss off the dictators long on self-interest and short on tolerable human rights records. I don't know about you, but it sounds like fun to me.
As to what to do with the Saudi's, I would say be their friends, but with limits (see Khashoggi). Don't expect much in return for your friendship. It will be lopsided as some friendships can be. As to geopolitics and a presence in the Middle East; you can have that. We just won't need their oil. The Russians don't either, so that makes us kind of even with them, doesn't it? And all those policy folks, screaming about diplomacy and normalizing relationships, remind them of Russia's seventeen years in Afghanistan until we took our turn. Where did that get them? Remind them too of the decades we've toiled in the Persian Gulf. Where did that get us?
I can answer that.
The Saudi's are now, in the midst of the Coronavirus pandemic, opening up their spigots as a direct strike at American's energy independence. But they always do that, regardless of how many of our troops have been killed and maimed defending order in their area of the world. Billions and billions and billions of dollars have been spent too, dollars they do not payback. It really is time to go. It's over. They've moved on. So should we. Think of it like a divorce. You have the moral high ground so no one can blame you.
Another thing. Turning our back on MBS's misdeeds just doesn't cut it anymore. Who's going to be his next Jamal Khashoggi, when does he next fill up the Riyadh Ritz Carlton, who is the next cousin to be detained as he consolidates power? You are the friends you keep, sir. This is a simple and homey kind of thing to say-which makes it true. So, let's dump this guy. But be nice about it. After all, we still want him to buy our stuff, but not with the currency we just handed to him.
If the Coronavirus has taught us anything, it's that supply chains essential to life in America should not be outsourced. Move energy and pharmaceuticals and all other essentials back home. We're safer that way. You'll be creating homegrown jobs and we won't have to kiss anyone's backside. No longer is there any need for that. We have it all; shale, wind, solar, nuclear and enormous offshore potential.
One last point worth mentioning is that energy independence was about to fall apart anyway. The present structure of shale wasn't working-"present" meaning two months ago. Producers can't generate free cash flow, pay off ridiculously (and irresponsibly) large amounts of debt, and grow reserves at the same time, at least not if they want to stay listed on the NYSE. The industry was already struggling at $55 oil and $1.80 gas. Everyone was hedging every time there was a little bounce. Service companies in the shale sector were being squeezed into unprofitability. Leave natural gas alone for now but fix the cost of oil. If too much is produced, it can be sold and exported at whatever the going rate is.
Should there be naysayers, those that say this is nothing more than a bailout request, I say so what. It is and it isn't. Prices will be low, but that will fix things and then there will be another mad rush to produce because prices will be high. Trust me. It happens every time. Boom and bust. Go to an energy conference and you will find all the producers talking about their humongous acreage position, and all the frackers talking about their humongous horsepower. Margins and profits won't come up. Trust me. We can't help ourselves.
In closing, Mr. President, we finally need to go it alone. Shale has proven that we can. No wars, no backroom deals, no dictators. Remaking the oil world could be an absolute boon for the US economy, a cleaner environment and a guarantee at the energy independence you have touted. It's time to adjust to the new world order and you are the only president I have known that would have the cajones to do it.
Sincerely,
Dan Doyle
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Dan Doyle is president of Reliance Well Services, a hydraulic fracturing company based in Pennsylvania. More
Comments
I hope the world's oil and gas community stands in solidarity and does not allow China to buy any oil assets at rockbottom prices.....or are you dumb enough to believe that China can have fewer deaths than Spain from COVID-19 without a vaccine?
Since its inception in 2008 the US shale oil industry has never been a profitable company. If it was judged by the strict commercial criteria by which other successful companies are judged, it would have been declared bankrupt years ago.
US shale drillers have been encouraged by easy liquidity provided by Wall Street and other investors to continue production even at a loss to pay some of their debts. In so doing, their outstanding debts have mushroomed to hundreds of billions of dollars leading to large number of bankruptcies among them.
And with a breakeven price ranging from $48-$68 a barrel and a well depletion rate of 70%-90% after first year production, the overwhelming majority of the shale drillers can’t survive low oil prices let alone a price war between Saudi Arabia and Russia. At $30-$35 oil, US oil production could drop by around 1.5 million barrels a day (mbd)
Still, President Trump’s administration is under pressure to keep the shale oil industry alive even if on a life support machine not only because it is a $7-trillion industry employing more than 2% of the work force and therefore very important for the US economy but also because it enables the United States to have a say in the global oil market along Russia and Saudi Arabia.
Many ideas are being considered for bailing out the shale industry including an import tax on all foreign crude oil exports to the US. One of these ideas sees the United States imposing a fee on imported oil or products. It engenders setting a floor price of $50 a barrel. So if the oil import price goes down for instance to $30, then an import fee of $20 per barrel would be paid to the United States Treasury. Likewise, if the import price is $50 a barrel or higher, then no fee is paid.
Calling it a fee doesn’t change the fact that it is a tax or a tariff on oil imports. It is no more than an opportunistic way to fleece the oil-exporting countries and save American tax payers the cost of bailing out the shale industry.
Still, it won’t work. The United States import currently 8-9 mbd. A tariff of say $32 a barrel will earn US Treasury $58-$66 bn a year. This will hardly pay for the hundreds of billions of dollars the US shale oil industry owes. Moreover, major oil producers like Saudi Arabia, Russia, Iraq and UAE will stop exporting oil to the US and concentrate on the most important market in the world, namely China and the Asia-Pacific region.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London
I'll say this - you "free market capitalists" sure can sign government checks and ask for favors.
"...Can you help a brother out and put your finger on the scale for one of your own?"
In business, you adapt or die. You've failed at both.
Hey, Fracking Guy, why don't you make shale oil net-zero carbon THEN ask western governments to mandate it. Arguing in favor of protectionism on the basis of energy independence -- which is not at all synonymous with energy security -- is silly.
Look, fracking investors and banks who made them loans are going to burn. That's inevitable. Start looking for other jobs. The Russians and Saudis will sell their oil at dirt cheap prices to the American consumer. When global demand starts to rise the US fracking industry will get new investors, though much more careful.
Also, if you think Trump is such a great guy, ask him to explain why he didn't prepare the economy for this pandemic. A competent leader would have done what countries like Taiwan did, e.g. Taiwan mandated mask wearing to slow virus spread. Their economy is up and running because they took smart steps at the beginning. They didn't manage the pandemic like it was a liberal hoax.
It is unsustainable business with bad environmental impact. We will experience 2nd bankruptcy wave in span of just 6 years with total costs of probably well over 300 billion – 50 billion/year.
Shale supports directly and indirectly around 2 millions of jobs on yearly bases. This means that every job did cost US investors 25.000 USD/job/year over those 6 years. What did US get back for this huge investment? Billions in stranded assets, lower price of oil and gas and dream of energy independence.
Author prepossess to implement import tax, but don’t realize that it would destroy US´s export of oil and gas products, which is around 6 m/bbl./day. There go hundreds of thousands of jobs. In one day after implementing import tax .
Tax breaks to refineries to change to light US crude oil instead of Venezuela´s heavy oil? I see no reason why US people should pay for it. If president cares about it, he can mandate it and let them pay for it. In fact, if he would be so great as author implies, he would have implemented it already 3 years ago. But president does not care.
With massive EV mandates in China and EU there is no doubt that oil peak demand will be here in 5 maximum, 10 years. In this environment everyone understand now that shale has no future. Imagine that government instead of trying to save unsustainable business model would create framework which would allow electrification of US transport sector, which would end our reliance on oil and gas.
Solar industry supports 250.000 jobs today and represents around 2% of US energy mix. With 50 billions/year US is wasting each year to support shale fracking it would in 5 years easily have more people working in solar sector than in shale and several millions of EVs would be sold every year. Majority of those jobs would be in solar installation thus it would be impossible to lose them because of some stupid price wars between Russia and Saudis. Air and water would be cleaner and price of oil would be at least as cheap as today, because world instead of adding 1 million/bbl/day each year would be decreasing its oil demand.
US would not have to keep its military in middle east and would not to have to support corrupted and criminal regimes around the world.
I am sure that author with his experience would make great money in geothermal, if it would receive just a small fraction of support that shale receives today.
This is the dream we should be dreaming and not just some pipe dreams about unsustainable energy independence, which relies on destroying environment and stealing money from investors through biggest ponzi scheme in US history called shale fracking.
Good job, America (and white evangelicals!). Speeding your way to irrelevance and 3rd world status, led by shameless, dense twits like Dan Doyle.