The global oil industry was rocked when the West Texas Intermediate (WTI), the United States oil benchmark, took its worst dive in history.
In April, the WTI benchmark hit negative digits for the first time in history. Oil had lost value significantly, with minimal storage facilities available and a global pandemic that restricted people from making purchases.
Washington Readies a Possible Bailout for Big Oil
Things haven’t gotten much better since then, although there have been alleviations. However, like every industry in crisis, there have been talks of a possible federal bailout for oil and gas firms that might be in dire need.
The President himself fed into those rumors, tweeting recently,
“We will never let the great U.S. Oil & Gas Industry down. I have instructed the Secretary of Energy and Secretary of the Treasury to formulate a plan which will make funds available so that these very important companies and jobs will be secured long into the future!”
The push for the bailout is understandable. Despite several warnings, the oil and gas sector remains one of the most crucial components of the American economy.
According to reports, the Bureau of Labour Statistics estimates that the extraction industry alone employed 145,000 people in 2018. PricewaterhouseCoopers also forecast that the development of the country’s shale natural gas reserves could lead to a further 1 million jobs by 2025.
With several big names now vulnerable, letting the industry die will be a mistake – one with ramifications that are perhaps even worse than the 2008 financial meltdown.
The government itself has been in a bailout mood, with a $3 trillion stimulus plan for small businesses and employees already drying up. Last month, Washington also agreed to issue $25 billion for the aviation industry, as companies’ operations have taken a hit from travel restrictions. So, why not oil?
Let the Market Cull the Weak Ones
Well, according to Dan Eberhart, the government might want to be careful with that plan. Eberhart is the chief executive of Canary, an independent oilfield services company in the United States. In an opinion piece published on CNN Business, he counseled that the government should consider an issue such as an oil bailout with care.
As he explained in the piece, this crisis is a growing pain that the American oil industry will have to endure for the future.
The oil exec pointed out that it won’t be able to compete with lower-priced markets like Russia and Saudi Arabia if it continues to operate as it has. Getting a government bailout will cut out all incentives to do better and hurt the industry’s future.
Citing figures from the International Energy Agency (IEA), Eberhart pointed out that global oil production is declining. Soon enough, storage capacities will fill up, and there will be a surplus of oil. At this point, the market will probably go negative again. The only difference, however, is that the government won’t be able to afford a bailout.
“Government intervention in the market risks delaying the rebalancing that needs to happen, particularly in the US sector where many companies are burdened by heavy debt loads,” he emphasized.
Eberhart explains that the market’s rebalancing is a much-needed move, as several underperformers have been able to mask their flaws with debt relief. Now, with capital markets closing on them, investors will be able to separate the wheat from the chaff.
By allowing the forces of demand and supply to play, Eberhart believes that the market will strip down to the few stronger and well-managed firms. As he believes, these firms should be willing and ready to perform when the market hits WTI levels less than $30.