Thursday, April 30, 2020

Christian completely correct about allowing free market to work re: Energy Prices

"Consider the work of God;
For who can make straight what He has made crooked?"
Ecclesiastes 7:13

Apparently, with the recent dip in oil prices, some really bad ideas are making a comeback.

Wayne Christian addresses one:
One solution proposed to my agency, the Texas Railroad Commission, is to “prorate” or limit the production of crude oil in Texas. That proposal will be considered at the May 5 meeting. The Commission adopted “prorationing” in the late 1920s, but abandoned the practice after 1973.


Over the last few weeks, I have thought long and hard over whether this is a direction Texas should take. A lot has changed since our state last prorated oil production. For example, in 1950, Texas controlled over 20 percent of the world's oil supply, today we control roughly 5 percent. Given this, a government mandate cutting oil production twenty percent across the board would not have a significant impact on worldwide oil supply. Furthermore, industry is already reducing production on its own. By allowing the free market to work, producers can determine for themselves what level of production is economical.

Virtually every major trade association has come out against this policy from the Texas Oil and Gas Association which represents small to large companies spanning every sector of the industry. The Texas Alliance of Energy Producers stated in its testimony against proration that a vast majority of its 2,600 members "employ 20 people or less." Diamondback Energy credited the competitive free market in allowing it to grow from 10 to 700 employees since 2007, and said it would halt all drilling in Texas if the state implements proration.


[T]he truly bold decision in governance is to not give in to pressure and to say no. Implementing an antiquated policy simply because it exists is not bold. I refuse to do something just to say I took action, because taking the wrong action can actually make things worse.
A few thoughts:

  • We weren't previously aware that this was even under consideration.
  • Over the long run, this would only handcuff Texas producers while helping all of the various petroleum producing global bad guys.
  • Most of the production cutbacks are already taking place, so-called "proration" would only make ramping back up in the future more difficult.
  • So-called "proration" removes the incentive to innovate.
  • We don't know with 100% certainty that this is the case, but we've heard that some of the bigger producers have escape clauses in some of their contracts that would kick in if the state took this action.
    • Note: Like we said, we don't know this with 100% certainty...but it would explain a lot.
Bottom Line: This would seem fairly obvious.  Yet, apparently, it isn't.  Kudos to Commissioner Christian for sticking to his guns.

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