It’s been a wild couple of weeks in the oil markets. Following a price war between major petrostates, the price of oil has tanked. Ever since, Donald Trump and congressional Republicans have been desperately trying to save a deeply indebted oil industry. We can all but expect a Trump-led bailout for Big Oil. Instead, our law and policy makers should let the oil producers fail, and devote resources to stave off the next crisis — the climate crisis — before it gets even worse.
The ongoing economic fallout of the coronavirus pandemic has caused oil demand to plunge worldwide. On March 6, Russia withdrew from its pact with the Organization of the Petroleum Exporting Countries (OPEC), and began producing more oil, driving the price of oil down even further. Russia may have been motivated, at least in part, by a desire to hurt U.S. shale oil producers. And while some, like Mexico, took steps to protect themselves against just such a price collapse, U.S. oil producers were loaded up with debt and totally vulnerable to a sudden drop in oil prices. By April 1, Whiting Petroleum Corp. became the first major U.S. fracking company to file for bankruptcy since the pandemic began, with many analysts predicting more bankruptcies to come.
Trump’s never been shy about his love of oil and gas companies. After all, they were major funders of his inauguration, and continue to be major donors to his campaign. When the oil price war broke out in early March, Trump and congressional Republicans began to talk tough to try and secure the higher oil prices that teetering U.S. oil companies need to survive. GOP Sen. Bill Cassidy introduced a bill to withdraw U.S. troops from Saudi Arabia if the country doesn’t cut oil production, and 48 House Republicans sent a letter threatening to end the U.S.’s economic and military cooperation with Saudi Arabia if the country didn’t cut production. When OPEC+ came to a deal to cut production, Trump openly thanked Saudi Prince Mohammed bin Salman and Russian President Vladimir Putin for their work to “save hundreds of thousands of energy jobs in the U.S.”
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But while the OPEC+ deal may have bought the over-leveraged U.S. oil producers some time, many analysts are predicting it won’t be enough. There’s been so much overproduction of oil there’s no space to store it — leading to creative and inefficient storage methods, like loading up boats with barrels of oil. It seems that without enormous help, more U.S. shale oil producers will go bankrupt.
Perhaps that’s why Trump has been increasingly vocal on Twitter about oil production, sending two market-moving tweets in less than a one-week period. First, it was his misleading tweet promising cuts well before they were negotiated, which pumped oil prices up by nearly 50 percent at the intraday peak. Then, when the OPEC+ deal didn’t seem to move oil prices much higher, Trump tweeted right before the market opened on Monday, April 13, that he thinks OPEC+ is actually going to cut production by 20 million barrels of oil a day, not the 10 million that was reported.
Trump is eager to bail out his donors, and protect the interests of vulnerable GOP senators in oil-producing states like Texas. The White House recently hosted nine oil and gas executives for a meeting with Trump administration officials. Which is why, should the OPEC+ deal in fact not be enough, we should expect Trump to come to Congress and ask for a Big Oil bailout.
There are a couple of ways that a bailout could play out. It could be a traditional one, with Congress allocating money to failing oil firms. But it could also be a bailout led by the Federal Reserve. And in some ways, there has already been an indirect bailout by the Fed. On April 9, the Fed announced that, in addition to the corporate bonds it was already buying, the Fed would also buy “junk” bonds: bonds that are seen as riskier by Wall Street ratings agencies. This could indirectly benefit shale producers, since they are heavily indebted. Energy companies make up a whopping 13 percent of the lowest-rated, riskiest kind of corporate debt. And for 10 out of the last 11 years, energy companies accounted for the majority of the junk bond debt. Why should the Fed reward a decade of bad bets by oil companies?
This would not be the first time the Fed acted to bail out non-banks during a crisis. During the 2008 financial crisis, the Federal Reserve gave emergency loans not just to failing U.S. banks, but also to foreign-owned banks and non-financial firms like Caterpillar and Toyota. The Fed could also bail out the U.S. fossil fuel industry by simply letting the failing companies be taken over and operated by Wall Street banks. Reuters reported that some of the largest U.S. banks are already considering seizing the assets of troubled oil companies that may default on their loans. Rather than selling off these borrowers’ assets at depressed prices, big banks are looking into operating the oil fields and gas operations themselves. Because of regulatory constraints, the banks may require the Fed’s formal approval to run these newly acquired oil and gas businesses. It seems unlikely they’d oppose a bank takeover of failed oil companies. After all, the Fed is one of the only central banks not to participate in the Network for Greening the Financial System, an international group of central banks working to integrate the risks of climate change. Unfortunately, it seems likely that the Fed would simply let the “too-big-to-fail” banks to become “too-big-to-fail” oil titans.
And it’s not just the Federal Reserve that could act to allow banks to become more active in the oil and other commodity markets. One regulator, the Commodity Futures Trading Commission (CFTC), gave Capital One a waiver that allowed the company to continue to make bets in oil and other commodity markets, after Capital One’s trading exceeded a threshold that would normally require it to become subject to more oversight. The company said it would not use the waiver, likely due to scrutiny from both the media and climate groups. But there is no guarantee that the CFTC wouldn’t grant similar waivers to other banks.
Lawmakers and advocacy groups alike are sounding the alarm on the dangers of a coming Big Oil bailout. The Center for International Environmental Law released a report summarizing the unprecedented lobbying spree fossil fuel companies are undertaking to try and exploit the global pandemic, including: pushing for regulatory rollbacks, suspension of environmental law enforcement, criminalization of protest and seeking direct bailouts. Journalist Amy Westervelt and Drilled News have documented over two dozen ongoing lobbying efforts by the U.S. fossil fuel industry, from requests to roll back fuel efficiency standards to suspending enforcement on environmental infrastructure obligations. And a report by Friends of the Earth warns that the Fed’s corporate debt purchase program could be a “big oil money pit,” benefitting both oil giants like ExxonMobil, Chevron and Conoco, as well as 12 fracking-focused firms.
On April 15, Rep. Nanette Diaz Barragán, Sen. Ed Markey, and 39 other members of Congress wrote to the Treasury and the Fed, opposing the use of CARES Act funds to bail out the fossil fuel industry. They point out that transferring billions to the fossil fuel industry is “especially abhorrent during a pandemic whose burden falls heaviest on Americans with weakened respiratory systems.”
In the best case, Congress should oppose any Treasury bailout money or Federal Reserve-run facilities being used by companies engaging in fossil fuel development. At a minimum, any bailouts must be conditioned on taking steps that free the U.S. from our dependence on fossil fuels. The work of the Association of Flight Attendants-CWA, AFL-CIO union, led by President Sara Nelson, led to conditions being placed on the airline bailout — requiring money go directly to payrolls, and preventing company-enriching moves like big executive payouts, paying dividends to shareholders, or companies buying back their own stock to raise stock prices. Congress should similarly place strict conditions on any energy bailouts. For example, bailed-out energy companies should be required to retire aging coal and gas plants, invest seriously in renewables, and force the companies to undergo a climate stress test — modeled after the financial stress tests developed for banks after the last financial crisis. A climate stress test could examine the potential economic impact of adverse climate scenarios. For example, firms could be required to look at risks like physical and human disruptions from extreme weather events, or the impact of the market moving quickly away from oil — due either to the kind of oil price drops we’ve seen with coronavirus, or due to a serious shift away from oil and into renewables.
Lawmakers must stand firm against any Big Oil bailouts, be they in the form of money from the Treasury, the Fed making purchases to prop them up, or financial regulators loosening the rules to let banks take them over. But simply rejecting bailouts isn’t enough. After all, oil companies are lobbying for financial rescues right after they received a regulatory rescue. In late March, the Trump administration announced it was temporarily halting enforcement of air and water pollution rules. Letting companies self-monitor whether or not they are exceeding hazardous levels of air pollution is outrageous and reckless, and demands drastic action and increased oversight attention from Congress.
Unfortunately, despite the urgency needed, reporting indicates that it is unlikely House Speaker Nancy Pelosi will include measures to address the climate crisis in the next stimulus. This is the wrong approach. With 22 million people unemployed and many more to come, and the International Monetary Fund predicting that we are facing the worst downturn since the Great Depression, now is the time to invest in a Green New Deal. It would not only end our current dependence on the decisions of petrostates like Saudi Arabia and Russia, it would also create needed jobs for an economy that will be shrinking for months (if not years) to come. And most importantly, a Green New Deal would ensure that the United States is not once again caught utterly unprepared by a crisis. Trump saw the coronavirus pandemic coming, and decided not to act. Congress must not repeat this mistake with the slow-motion train wreck that is the ongoing climate crisis.