Get Ready for an American Energy Comeback

Jun 25, 2020 12:59 PM

Kevin Mooney, Real Clear Energy | June 25, 2020

Judging from the headlines, America's energy sector could collapse at any moment. Scattered amidst coronavirus coverage are reports of plummeting energy stocks and commodities traders paying people to take barrels of oil off their hands.

The COVID-19 outbreak certainly disrupted the energy sector, just as it has countless other industries. But these setbacks are only temporary. Oil prices have already started to rebound as global markets adjust to the COVID-19 outbreak. Once demand returns to normal, so will the energy industry.

Some public officials think they can hasten this comeback by interfering with oil production. But this would only push the energy industry off the path to recovery. To help the industry recover, policymakers simply need to sit back and let the market work itself out.

Stay-at-home orders have caused energy demand to plummet. These days, most people don't need to put gas in their cars or keep the lights on in their businesses. As a result, demand for petroleum dropped nearly 5 percent between February and March. Last month, U.S. oil prices went negative for the first time in history.

But the economic reality is hardly as dire as these numbers suggest. Oil is traded based on its future price -- so, when traders see plummeting demand on the horizon, it makes financial sense for them to offhand these "futures." That's what happened late last month. Futures prices may have dropped, but oil is still inherently valuable.

When the lockdowns end, demand for oil will skyrocket. Before COVID-19, the U.S. Energy Information Administration projected demand for global fuels would increase by 1.4 million barrels a day in 2020. As recently as March, the agency predicted a modest rise in global oil demand for the coming year.

Of course, the agency has since revised those estimates down. But the world will need oil again someday soon. When that need arises, America's energy industry will be ready.

Oil's inherent value has helped the energy industry survive market shocks in the past. In fact, past crises pushed oil and gas companies to develop new technologies and processes that benefit consumers. For instance, the 2008 financial crisis led to a wave of innovation in the hydraulic fracturing technologies that helped make the United States the global leader in oil and gas production.

Despite the energy industry's record of resilience, some policymakers still want to intervene. Texas officials recently considered imposing production quotas on the state's oil companies. At the federal level, President Trump has threatened to impose tariffs on foreign oil.

Heavy-handed market interventions like this would distort our well-functioning energy markets. By the time policymakers have fully implemented tariffs and quotas, demand for oil may have returned to normal. Faced with these restrictions, energy firms couldn't ramp up production to meet demand. This would lead to further price fluctuations and could even cause an energy shortage.

Despite the challenges of the COVID-19 pandemic, America's oil and gas companies have what it takes to fuel the country's economic recovery. Policymakers can help the industry by containing the outbreak and restarting the economy. Once that happens, energy markets will take care of themselves.