An SPR fill, tariffs and a royalty holiday? Trump faces oil price options

Faced with a dramatic decline in global oil prices, US producers are pressing the Trump administration and Congress to take actions to counter the impacts of demand loss caused by the spread of the coronavirus and supply increases caused by the collapse of the OPEC+ agreement.

"There may be a need for the US to look to whatever tools it has to punch back," Erik Milito, president of the National Ocean Industries Association, told S&P Global Platts Thursday.

There are various tools being considered, from a broad financial bailout of the US exploration and production sector to government purchases of millions of barrels of crude to refill it Strategic Petroleum Reserve, according to sources.

But each option has drawbacks and may prop up one domestic producer while doing little to prevent another from going out of business.

"The problem is there are a lot of options, but there aren't a lot of great options," said Glenn Schwartz, director of energy policy at Rapidan Energy Group.

While it is unclear which, if any, option the Trump administration is seriously considering, here are some of the most likely paths it could consider to blunt the impact of the oil price decline on US producers:

FILL THE SPR

Earlier this week, the US Energy Department postponed the sale of up to 12 million barrels from the Strategic Petroleum Reserve, due to market conditions. It's not clear when, or if, DOE will reschedule that sale, but the administration could consider near term purchases of crude for its SPR, which includes four storage sites along the Gulf Coast. The SPR, which currently holds 635 million barrels of crude, has an authorized storage capacity of 727 million barrels. That leaves 92 million barrels the government could theoretically purchase, but infrastructure constraints limit how much it could move at any given time into its storage sites.

Another complication is the Democrat-controlled House of Representatives which would likely block any effort viewed as benefitting the US fossil fuel industry. The SPR was nearly filled during the George W. Bush administration through a program in which the government accepted oil from producers in lieu of cash royalties for production on federal lands and waters. That royalty-in-kind program was ended in September 2009 by President Obama's Interior Department.

LOANS, TAX CUTS

The Trump administration may consider issuing low-interest loans to US oil producers, which have seen diminished credit availability from banks. But such loans would largely benefit companies with large amounts of debt and may do little to address market conditions, Schwartz said.

"That's just creating a new tier of debt that would have to be repaid eventually," he said.

The administration might pursue across the board tax cuts, but such a plan would require congressional approval and a compromise with Democrats, such as increased federal spending for renewables or electric vehicles, which President Trump would find difficult to accept, Schwartz said.

TARIFFS

The Trump may also seek to help US producers by placing taxes on imports of foreign oil, potentially targeting individual countries. The Domestic Energy Producers Alliance, an industry coalition chaired by Continental Resources CEO Harold Hamm, plans to petition the US to seek an anti-dumping case against Saudi Arabia and Russia for oil price manipulation. The US could impose tariffs on imports under Section 232 of the Trade Expansion Act on national security grounds. Trump may also raise import duties on oil imports under Section 201 of the Trade Act of 1974, arguing that these imports are injuring the US oil industry. Such tariffs, however, would not help in the near term.

"There has to be an investigation, and a finding and a response and that all takes time," Schwartz said.

Trump could declare a national emergency and impose tariffs under the International Emergency Economic Powers Act. In 2019, Trump imposed tariffs on Mexican exports under that act after declaring illegal immigration a national emergency. Schwartz said the tariffs would certainly be challenge in courts, but a legal resolution would likely take months, allowing the tariffs to have an impact while the court proceedings dragged on.

NOPEC

With criticism of OPEC's role in the historic decline in oil prices ramping up, Congress might again take up the No Oil Producing and Exporting Cartels, or NOPEC, Act. The bill, which typically generates congressional support when prices are increasing, was passed by the House Judiciary Committee in early 2019, but was never taken up by the full House nor the Senate. Versions of the bill, which would allow the US Department of Justice to sue OPEC members for antitrust violations, have been introduced in every Congress over the past two decades. As a presidential candidate, Trump supported the legislation, but has not backed it since elected.

"It sort of a nuclear weapon sized threat, it would permanently alter important geopolitical relationships," Schwartz said.

ROYALTY HOLIDAY

The Interior Department may also consider suspending or lowering royalty payments for production on federal lands and waters.

"This would be a band aid, more than anything else, to keep operators afloat while things hash out," Schwartz said.

But the move would disproportionately impact operators in states with a higher percentage of drilling on federal lands, such as New Mexico, over operators in states, chiefly Texas, where the vast majority of production is on state and private lands. In addition, the move could put additional downward pressure on prices with operators ramping up output on royalty-free acreage.

Schwartz said Interior may also consider speeding the approval process for drilling permits, but said this process is likely to be overturned by courts who have invalidated permits for failing to meet requirements under the National Environmental Policy Act and other federal statutes.