Strike While the Iron is Hot

Road to Resilience


Recently, for at least a day, oil companies in West Texas had to pay $37/ barrel to get somebody to take their oil!  It has since gone back to having a positive value of about $10/barrel, but, clearly, the pandemic is applying further stress on an already stressed industry.  With all the planes, trucks, and cars parked, demand has plummeted.

Due to the tapping of the  difficult-to-access reserves through fracking and other expensive extractive procedures, the US had become the leading fossil fuel producer in the world, something that would have been unbelievable just few years back when Obama was bemoaning the fact that we were dependent on foreign oil.  As demand outstripped supply 10 years ago, the price of oil skyrocketed.  It was over $100/barrel for a while, and the hard-to-get reserves here required only about $50/barrel to break even.  Fracking and tar sands became profitable, the industry invested heavily, and US oil and gas output doubled between 2009 and 2019.  Coal use diminished rapidly due to its deep carbon footprint, pollution and harmful extraction procedures.  Oil and gas are our main energy sources.

The expansion of fossil fuel production was first understood as a national security issue.  We had to be energy independent.  As production surpassed our own needs, we were only too happy to sell the surplus to the world.  So much for lowering our carbon footprint!

Before the Covid 19 pandemic, the fossil fuel industry was already in trouble.  The environmental awareness in light of the climate crisis was clouding the future of fossil fuels.  Fracking and tar sands production are very dirty, polluting, and expensive, and have been losing the public relations battle for some years now.  Technology and production capacity of wind, Solar, and energy storage have been coming on fast, and they are now the cheapest new energy source.  For some years now, between oil spills and borderline oil prices, the oil industry has been operating in the red.  The fact that they are still alive is probably due to the exorbitant subsidies that you and I give them, over $2000/yr/person.

More recently, the Saudis and the Russians have been having a price war, each trying to drive the other out of business.  The price fell.  Trump supposedly got them to agree to a production cutback to raise the price, but the damage was done.  The price was still dangerously low for US producers when the bottom dropped out due to the pandemic.

All over the US, fossil fuel companies are sealing off productive wells and laying off workers.  Depending on how long the pandemic goes, many are looking at bankruptcy.  The government is considering whether to bail them out, but an important consideration is that the banks are not comfortable with the idea of investing further in an unprofitable operation.  This has little to do with the banks having a conscience; they need to make a profit.  Instead of extending credit, they are contemplating their other alternative in a bankruptcy:  seizing assets.

Thanks to the pandemic, we now have what may be our very best opportunity to fashion a controlled exit for the fossil fuel industry.  If our government seized fossil fuel company assets as part of a bailout, we could orchestrate a closing down as we ramp up renewables to replace them.  If we see that existing reserves are sufficient to tide us over until renewables can take over, we can eliminate further exploration and infrastructure investment in fossil fuels.  We could redeploy the laid off workers to seal off unneeded wells, do environmental cleanup, and help build the renewable energy infrastructure.  The government can do what the industry will never do—plan for their own demise.  State ownership is the norm:  Saudi Arabia, Russia, Iran, Nigeria, Venezuela, Kuwait, and China have state-owned companies.  Norway is now private, but the state owns 67% of the shares.

This needs to be done now.  When social distancing ends, I foresee a massive explosion of travelers.  Gasoline, especially at low pump prices, will sell fast, and flights will be booked.  The government could set gas prices to favor electric vehicles and perhaps encourage people to appreciate the peace, quiet, and clear skies they’re experiencing now.  There will definitely be a rebound but maybe we can influence it to include some of the lessons we have learned when the pandemic stopped everything.  Most people I talk to think the old normal is gone forever.  The question is:  will the new normal be better or worse?  If we are all really alert and proactive, we can make the new normal that nurtures all of us and the world together.  This may be the opportunity of a lifetime!