Oil Industry Continues to Recover but Focused on Texas
Focus More on Oil Country, Less on the Oil Industry
May 6, 2020
The Trump administration's repeated attempts to support the U.S. oil industry have triggered mixed reactions, with both supporters and detractors forming ever-changing camps that defy categorization. When Texas holds hearings to set quotas on oil production, and when the U.S. president, along with Republican senators, cheer Saudi Arabia to cut production to lift oil prices, our mental maps need overhauling. Yet the debate itself is too centered on the U.S. oil industry and whether to help it. We need to broaden that conversation. It is not the oil industry that needs a bailout; it is oil country.
Those who support federal help fall into several camps. Some see oil as a strategic commodity and are unashamed to ask for federal help. Others see governments around the world meddling in oil markets anyway, so why defer to Riyadh and Moscow but not Austin and Washington, D.C.? Reluctant groups want the oil industry to tap into whatever help is available to companies (If the government is offering, why should they refuse?) more broadly but without any special provisions. Some welcome the chance to fill the Strategic Petroleum Reserve, seeing it as an energy security measure as much as a measure to support the industry. And others are willing to provide help on a conditional basis, extending support to nudge the industry toward improved environmental stewardship of land and resources.
Critics of support fall into several camps themselves. One camp believes in markets and their ability to determine who wins and who loses. That faith in markets is often paired with the belief that commodity cycles are part of the creative destruction that makes the U.S. oil industry more competitive in the long run. They recoil at the pain but see it as necessary to produce new practices and lower costs later. Commodities always go up and down, and it is futile to come asking for a bailout every time the price drops. Critics on the other end of the spectrum see the oil industry as an anachronism whose demise is both welcome and an accelerant for the energy transition. They would not want to spend a penny to support it unless it is to take it over.
Ideally, support for the industry would further well-defined energy security objectives, rather than merely bail out companies that may have gone out of business anyway. Yet missing from this debate is the recognition that many states and communities around the country have economies tied to oil and gas production and prices. No matter what one thinks of the oil and gas industry, these places will suffer from the slump in energy prices, and their economic recovery will be hampered by the broader transition to low-carbon energy sources.
Most U.S. oil and natural gas production comes from just 12 states. The states use more energy to generate a unit of economic output than the rest of the United States, their employment is more geared to mining than the U.S. average, and their state budgets rely more on federal revenue than the average. Since 2012, states' economic growth has lagged the United States as a whole, sometimes by wide margins, despite several years of relatively high prices. Only three states did better than the U.S. average—California, Colorado, and Texas—likely because their economies are more diversified.
Therefore, the central task is not to support an industry or craft a response to the current moment. It is about helping the people who work in this industry, and it is about helping places find a new economic model. We have experience with place-based policies, which are coming back into vogue. Historical analogs, like the Tennessee Valley Authority or the Appalachian Regional Commission, provide an intellectual and practical foundation for how the federal government can support regional development. We have a long history of the federal government directing dollars to specific regions, especially the South. And several states are thinking strategically about how to use energy to promote economic development.
In an ideal world, such an economic transformation would involve a partnership between federal and state authorities. The federal government cannot alone reshape state economies: change needs to be grounded in the political economy of each place. But state leaders are often biased toward the tried and tested. They often hope, for example, that a jump in oil price will solve their economic predicament, rather than taking a long view and recognizing that an economy driven largely by oil and gas will become obsolete sooner or later.
Experience shows that such transformations efforts will require a clear narrative: what the economy looks like today, what it could look like in the future, and what connects the present to the future. What does Alaska look like after the last drop of oil is produced? What about Louisiana? Oklahoma? North Dakota? What industries will eventually replace or supplement oil and gas? How will taxes be levied and what kind of public services can the state afford? Thinking one or two decades ahead, what kind of strategic investments are needed today?
These conversations will require a willingness to experiment with different ideas. There is no need to think that new energy jobs must replace old energy jobs—that a state extracting oil today must manufacture wind turbines tomorrow. Maybe Alaska transforms itself into a research center or a military outpost in the Arctic. Maybe it becomes an even bigger logistics bridge between Asia and North America. Maybe it becomes a tourist destination. Maybe it is something else entirely. Each state will find its own place in an ever-changing global economy. The point is to make federal resources available to help it get there once state leadership has articulated a plausible vision.
Here is where the Covid-19-induced economic crisis can be turned into a blessing, by jumpstarting a process that needed to get underway eventually anyway. It is hard to imagine the United States taking serious action on climate change without those areas of the country that now produce oil, gas, and coal, seeing a viable economic role for themselves in a low-carbon economy. It is equally hard to imagine broad-based economic growth, while many states across the country fail to diversify their economies away from extractive industries. Whether the lens is climate or sustainable economic development, the answer is the same: hydrocarbon-producing states need to cushion the blow today but build stronger, more diversified economies tomorrow. And that is the conversation the country needs right now.
Nikos Tsafos is a senior fellow of the Energy Security and Climate Change Program at the Center for Strategic and International Studies in Washington, DC.
Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).
© 2020 by the Center for Strategic and International Studies. All rights reserved.
Source: https://www.csis.org/analysis/focus-more-oil-country-less-oil-industry
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