Sunday’s CNBC headline reads, “OPEC and allies finalize record oil production cut after days of discussion.”
One normally would interpret that headline to mean that OPEC agreed with non-OPEC members Russia, Venezuela, and Mexico on the production cut. One would not assume that the word “allies” refers to the United States. After all, we have for decades attacked the OPEC cartel for collusively raising oil prices, and Congress has enacted laws authorizing lawsuits against OPEC for precisely that collusive conduct.
Yet, there is this from the Washington Post:
Mexico had balked at a 10 million-barrel-a-day compact the Saudis and Russians were pushing and refused to agree to its share of cuts. That threatened to upend the proposal … but to keep the Mexican stand from undermining the fragile and tentative agreement, Trump announced that the United States would ‘pick up the slack’ so Mexico would not have to scale back too deeply.
In other words, President Donald Trump offered to reduce United States production of oil, and that reduction will be equal to the difference between the reduction Russia and Saudi Arabia are demanding of Mexico and the reduction Mexico is willing to make.
Abetting OPEC’s collusive conduct certainly represents a historic change in policy.
Yet it is not clear how the President could effectuate that policy. Private actors produce oil in the United States, and they make production decisions based largely on supply and demand considerations. So how could President Trump represent that the “United States” will reduce its oil output when the government does not control production?
He apparently will do so through a sleight of hand. He will count as reductions preexisting production cuts United States oil producers already made in response to declining demand. What caused that declining demand? The decision by many governors to put their states’ economies in an induced coma in response to the coronavirus; from the Washington Post: “‘We’d make up the difference,’ [President Trump] said at a White House briefing, then immediately added, ‘Now, the U.S. production has already been cut.’”
The Post reports that despite much grumbling in the Kremlin, Russia will accept the United States’ offer so that a global deal cutting oil production may be signed.
One has to ask whether this action is in the long-term interests of the United States. The President worries that declining oil prices will make oil production unprofitable for United States producers, which may threaten jobs in oil-producing regions. Job losses would concern any president, but should the United States (potentially) preserve those jobs by facilitating a collusive agreement by an oil cartel that has imposed billions of dollars of higher prices on consumers? And does the President’s action deprive the United States of any legitimate basis going forward for declaring illegal collusive conduct by the cartel?