U.S. oil bailout should pay to still the drill

The price for West Texas Intermediate futures fell on Tuesday to around $13 a barrel

  
Image used for illustrative purpose. Pump jacks are seen in the Lost Hills Oil Field, California April 20, 2015.

Image used for illustrative purpose. Pump jacks are seen in the Lost Hills Oil Field, California April 20, 2015.

REUTERS/Lucy Nicholson

DALLAS - There’s a better way for Uncle Sam to bail out America’s struggling oil companies than giving them emergency loans. Steve Mnuchin and Dan Brouillette – the U.S. Treasury and Energy secretary, respectively – want to double how much they can lend to mid-size players under the CARES Act, Reuters reported last week. Paying them to keep black gold in the ground is a less bad option.

The price for West Texas Intermediate futures fell on Tuesday to around $13 a barrel as the same storage concerns that ravaged prices for the May contract last week infected the June contract. Overall, the industry has some $200 billion of debt, Reuters reports. At $20 a barrel, nearly 400 U.S. drilling firms will file for bankruptcy by the end of next year, according to Rystad Energy; at $10 a barrel, that number tops 700.

So shoring up the domestic crude industry is key, especially given a core tenet of the current White House’s worldview is energy independence. Lending the industry money isn’t as straightforward as it was for airlines. That bailout was in large part to keep Americans on the payrolls. Drillers employ fewer people – and some of the bigger players reach far beyond U.S. basins.

A loan or an equity investment could help, say, Hess’s Guyana operation, or Occidental Petroleum’s fields in Oman. Moreover, neither form of aid would necessarily encourage drillers to do the necessary and reduce production.

Paying them to still their drills makes more sense. That would effectively turn large swathes of the Permian and other U.S. basins into a huge version of the U.S. Strategic Petroleum Reserve, federally owned stocks of already extracted oil stored in underground salt caverns along the Gulf of Mexico coastline.

In exchange for being rescued, recipients would forgo future profit from the oil. Meanwhile, Americans would know their access to domestic supplies is secure.

There are risks, such as a prolonged recession or a quicker shift to renewable energy than expected. In either event, the oil price might not rebound, leaving taxpayers saddled with losses – and at the extreme, stranded assets. Then government support looks more like a longer-term subsidy rather than a reaction to a black swan event.

That, of course, could also befall loans and equity stakes. But keeping oil in the ground would at least give Washington some semblance of control over the industry’s biggest problems: supply and price.

CONTEXT NEWS

- The price of a barrel of West Texas Intermediate was at $12.78 on April 27 at 3:08 p.m. EDT (1908 GMT).

- U.S. Treasury Secretary Steven Mnuchin said he is considering a government lending program for U.S. oil companies looking for federal aid, Bloomberg News reported on April 23.

(Editing by Antony Currie and Amanda Gomez)


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