Would Limiting Texas Oil Production Really Boost Prices?

Jason Lawrence | JD Supra

The combination of the COVID-19 pandemic and the Saudi-Russia price war is wreaking havoc on global demand for crude oil, flooding the market with cheap crude and pushing prices to the low $20/bbl range. In response to these events, the Railroad Commission of Texas (RRC) is weighing whether to cap—or proration—crude oil output in an effort to boost prices (the RRC has not prorated the production of crude oil since 1973). But, would such a decision, if mandated, really work?

The consideration for a statewide limit on crude production came after two of the top producers in the Permian Basin, Parsley Energy and Pioneer Natural Resources, filed with the RRC a Motion Requesting a Market Demand Hearing and Market Demand Order for May 2020 production, arguing that the oil price war and COVID-19 have created disruptions that have surpassed the “merely extraordinary”.

“By itself, Texas proration will do little to affect the stability of the oil market as Texas only produces 5 MMbbl/d, so a coordinated global effort would need to be undertaken.”

Parsley Energy told Reuters that it wants a comprehensive solution that might also include tariffs on imported foreign oil in an effort to help domestic producers. Coincidentally, the Oklahoma Energy Producers Alliance has urged the state’s regulator to also place limits on crude production.

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