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Lourcey Sams

Lourcey Sams

Lourcey Sams is an independent oil and gas operator in Midland, Texas.  Mr. Sams began his career with Amoco Production Company in Houston, Texas in…

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The Cheapest Way For Trump To Save U.S. Oil

The President of the United States has the power, at his sole discretion without any other authority, to place a fee on imported oil or products. It becomes variable when a base price (floor price) is set and a fee is paid on any imports where the price on imports is below the base price. If the base price for oil was set at $50.00 per barrel and the import price is $30.00 per barrel, then an import fee of $20.00 per barrel would be paid to the United States Treasury. Likewise, if the import price (world price) is $50.00 a barrel, then no fee is paid.  Thus, the fee is variable depending on the price paid for an imported barrel. 

Covid 19 and the Oil Price War

Recently, two events, the Covid 19 pandemic and an oil price war between Saudi Arabia and Russia have had an unprecedented effect on the price of oil. Covid 19 has had a shock on demand unlike any event since 2001. This, together with Russia and Saudi Arabia flooding the market with excess crude, has sent prices sharply downward. Each event alone would have had a negative effect on oil price, however, together they have shocked the market. The impact the fundamentals of a variable import fee would have on oil price would be somewhat tempered by these two-events combined at the same time. It is the author’s belief Covid 19 will dissipate and world demand will normalize in the short term. The price war could be longer term. Irrespective, a variable import fee would have a positive effect on the oil price, yet it would be far more effective under normal market conditions.

The Effects of the Fee

The majority of the oil in the world is owned by a government and therefor a government will set the price of oil. The United States is the largest consuming nation in the world, however, because our oil is owned by private industry, the United States does not currently have a role in setting the price. We have long been held hostage to the policies of OPEC and other governments. It is estimated that the current consumption in the U.S. is approximately 20 million barrels per day. Production estimates range between 11 and 13 million barrels per day, meaning a deficit between 7 to 10 million barrels per day. If an import fee with a base price of $50.00 per barrel is placed on oil and the US imports of 7 million barrels per day then the price of the imported barrel would be $50.00 (price plus fee). Any seller would seek this price and prefer to sell to the U. S. as opposed to selling at a lower price set by some financial market indices. Likewise, other consuming nations, seeking to maintain supply, would pay a higher price to purchase oil. Purchasers in the U. S., required to rely on imports would in turn pay a higher price for domestic oil than market indices. As such, the world oil price would seek a level set by the United States base price (floor price) as set by the import fee. Accordingly, the United States, would become a vital participant in determining the world oil price. Related: Oil Price Crash Opens A Window Of Opportunity For Renewables

Is the United States Truly in Balance?

Prior to the crisis of Covid 19 and the price war, there was considerable evidence that production in the United States was beginning to decline. Capital expenditures in 2019 were considerably reduced. The US rig count in the year prior to the current crisis was down over 250 rigs and the Permian Basin rig count was down approximately 55 rigs. Decline curve analysis for both the Delaware Basin and Midland Basin showed a decline prior to the two crises. Texas Railroad Commission data also indicated an oil production decline. It has been reported that the United States was near or at energy independence. The U.S. Energy Information Administration (EIA) states on their website “EIA is not able to determine exactly how much crude oil may originally have been imported from other countries, placed in storage, and then exported. The United States also produces and exports petroleum products, but EIA is unable to track how much of these petroleum exports are made from domestic produced or imported crude oil. Also, some U. S. crude oil exports are refined into petroleum products in other countries, which may be exported back to, and consumed in, the United States.” In other words, the U. S. is a net importing country. Remove U. S. crude oil imports and the U.S. would be unable to produce current petroleum refined products for consumption or export. This deficit will only balloon in the current environment. Capital expenditures were already considerably reduced in 2020 prior to the current crisis, but with recent announced reductions and cuts, it becomes alarming. Further, most of the recent increase in production in the U. S., is attributable to the “shale” plays. Shale production is not truly reserved based. Large capital expenditures result in high deliverability with hyperbolic declines. Massive reduction in capital expenditures will result in large production declines and a wider deficit.

Benefits and Energy Security

A variable import fee on United States imported oil or products with a floor price of $50.00 will set the U. S. price and hence the world price at $50.00. This would provide a stabilizing effect on the U. S. oil industry. Capital budgets could be set at reliable numbers with confidence. Bank debt would be secured and reliable. Jobs could be saved within predictable cash flow. In short, a critical oil industry would be stabilized. The United States needs energy security and a stable growing domestic industry is needed to provide energy security. The U. S. military presence in the Middle East is to provide a stable flow of oil and to provide energy security. Recent innovations by the U. S. oil industry have shown we can go a long way toward energy independence and energy security. The price war has as much to do about market share and eliminating the U. S. competition than any other factor.

By Lourcey Sams for Oilprice.com

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Leave a comment
  • Tamim Ahmadi on March 27 2020 said:
    Why would anyone sell anything if it will cost them and not make them any profite?
    Crude Oil sellers will just avoid selling to the US or sell for 50 dollar per barrel to the US and at the same time for mauch lees for the rest of the world.
    US will also not be able to sell theyr Crude Oil on the market for a price higger than the price offered by others.
    Making the price internaly higer in the US, wil isolate the US from the international market and could trigger a drop in the use of the dollar in the Crude trade!
  • ROBERT IRONMAN on March 27 2020 said:
    Excellent article and I hope our President takes this action soon.
  • BruceHendrickson on March 27 2020 said:
    Why didn’t I think of that? Nice to have good news.
  • Jan Durzynski on March 27 2020 said:
    I’m just happy we live in a non-communist state where we’re not bound by Gov’t-set tariffs, exemptions, import fees or bailouts and are subject to free market forces. Oh, wait...
  • zorro zorro on March 28 2020 said:
    the world oil price would seek a level set by the United States base price

    First, our main import source is Canada, and their tariff would be ruinous. That probably doesn't matter, as they will probably have to shut down and perhaps abandon the oil sands, maybe for years.

    So, without Canada, where do our refineries get oil? From various foreign countries, including Saudi Arabia. Can they use our light grades from the core of the Permian and Bakken? Nope, that's why it gets exported and we import the heavy/sour grades our refineries were set up for. But before paying $20-30 to export to us, they'd sell to anyone else. I'm not even sure how that would work, where we would get oil.

    None of that changes the fact that the world is so awash in oil, there's the very real possibility of filling up available storage, and not too far off. Even after the world recovers from the virus, oil demand is not likely to return to 100 Mbpd anytime soon, if ever. The only way you could support a price floor is if everyone was doing it, the whole producing world would say, you want a barrel of oil? It costs $50. Impossible.

    That means the high cost producers are the swing of the market, and until demand invades that supply, they'd just be out, and that's almost all of US shale, and probably all of Canada. I don't see how an import tariff would do anything to change that fundamental imbalance, other than to throw sand in the gears of our own refineries.

    If we could use our own oil, and just needed to import the shortfall, perhaps we could set a base price, at the expense of consumers of course. That might be a cost we'd be willing to bear to avoid losing all those jobs, blowing up our balance of payments, and being hostage to OPEC again. But I doubt it's politically possible. Moot point, we can't use our own oil.
  • Christopher Muenchhoff on March 28 2020 said:
    The oil price will stay low or even fall as long as there is more supply than demand. The sector has over-invested for several years, fueled by cheap credit and euphoria in the last oil boom.

    An import tax would pass the costs of keeping the US upstream companies to the US consumer who would have to pay higher prices. It would kill energy intensive industries in the USA and provoke import taxes in other countries for US products. But it would not solve the problem of too much oil is lifted.

    The only way get the price higher would either be marginal producers with the highest costs shutting down, or demand growing.
  • Mamdouh Salameh on March 28 2020 said:
    This is no more than resurrecting an old idea to impose an import tax on foreign crude oil exports to the United States to bail out a sinking US shale oil industry. This isn’t dissimilar to the tariffs President Trump has imposed on Chinese exports leading to a trade war that he lost. Calling it a fee doesn’t change the fact that it is a tax on oil imports.

    If implemented, the United States will not only be violating the WTO rules by impacting on the free movement of international trade but it will also be dictating a base price of $50 for oil and forcing oil-exporting countries to pay a fee to the US treasury when the oil price falls below $50. 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 US imports 8-9 million barrels a day (mbd). At a price of $40 for instance, the US will earn some $29.2-$32.9 bn a year from such a fee which will be a drop in the ocean when compared to the hundreds of billions of dollars the shale industry owes

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • David Messler on March 28 2020 said:
    It won't work. Price controls have been tried in the past, 70's and 80's. Shale oil is inherently more expensive than ME oil. More government interference in markets is never the answer.
  • Frank Walker on March 28 2020 said:
    Lourcey clearly has no idea how macro/micro economics work. This ridiculous proposal will only increase US production and further worsen the imbalance. Come on you American frackers - the method is uneconomical and has been for years - give it up already, time to pay the piper for all that value destruction you CEOs have done, and your complicit bankers. America has become a socialist economy - bail out banks & corps for moral hazard while betraying your own citizens. Disgusting!
  • Bradley Steeg on March 28 2020 said:
    If Donald wants to make every single American voter* really, really mad at him in the middle of a pandemic he should put a fee on oil imports.

    *excluding the very tiny number of Americans who make money from higher oil prices.
  • peep rada on March 28 2020 said:
    I can propose a scheme that allows at least partially to circumvent this tax.

    for example US refinery buys some oil for $50 barrel from saudis. saudis return $15 to refinery.
    Win win. saudis have sold oil for $35 instead of $20 per barrel and refinery has paid $35 for barrel instead of $50.
    good business. A lot of room for bribery, crime, other illegal stuff. Big money. Government is never going to root it out unless tax is removed.
  • Dani Nadaf on April 01 2020 said:
    If Trump will go forward regarding oil imported solutions ......inflation will damage U S economy....
    Trump can't keep the miss respect to all specially with king Soliman of Soudia Arabia..
    Looking dwon almost to everybody... at the end they will force him to look up...
    Trump is in trouble more than he take...
    We'll set and watch...
    Sylvie Trump ...
  • jatanh Hassan on April 03 2020 said:
    The cheapest way is just stopping oil import and depend on shale oil or stop American oil exports at about 3 million bpd level so will help the market and dont continue this policy of local oil surviving on the expense of other people countries by taking their oil market shares
  • Charles Kao on April 16 2020 said:
    Will that work ?

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