Global oil prices have declined nearly 60% since January 2020 (see Figure 1). Following a brief period of geopolitically-driven upward price pressure resulting from events in Iraq and Libya, world oil supply/demand balances were projected to be oversupplied by the second quarter of 2020. Reduced travel and other economic impacts related to the evolving COVID-19 outbreak are suppressing near-term oil demand. Oversupply expectations were amplified when the Organization of the Petroleum Exporting Countries (OPEC) and a group of non-OPEC countries (OPEC+), including Russia, failed to agree on an OPEC recommendation to reduce oil production by 1.5 million barrels per day until the end of 2020. Oil prices immediately and significantly declined. Subsequently, Saudi Arabia announced regional price discounts and plans to increase oil supplies in April. Other countries have also indicated intent to increase oil production. This combination of demand suppression and supply expansion increases short-term oversupply expectations and exerts downward pressure on oil prices. Prolonged periods of depressed prices could affect U.S. oil production (approximately 12.2 million bpd in 2019, the world's largest), exports, employment, and industry consolidation. Due to recent developments, a plan to sell crude oil—required in FY2020 by P.L. 116-94—from the Strategic Petroleum Reserve (SPR) was suspended.
While low oil prices are generally positive for consumers (i.e., lower gasoline prices), sustained low prices could result in financial stress for companies operating in the U.S. oil exploration and production (E&P) sector. The degree of financial stress will be unique to each E&P company and will depend on factors such as hedging positions, balance sheet fundamentals (e.g., debt liabilities and cash), cost structures, ability to renegotiate service contracts, and corporate finance actions (e.g., dividend adjustments and spending reductions). Companies with limited capacity to adapt could default on debt obligations, reduce employment levels, or file for bankruptcy protection. Industry consolidation through mergers, acquisitions, and distressed asset transactions is a possible outcome. Other companies that provide support to the E&P sector might also encounter challenging business conditions. Exactly how the U.S. oil sector might be affected—and the severity of these effects—is uncertain and will depend largely on the timeframe for price recovery.
During previous periods of depressed oil prices, Congress has considered various policy options that might provide some degree of relief to the U.S. E&P sector. For example, in late 2014 to early 2016, OPEC did not reduce production to address oversupply, some producers increased output, and prices fell below $30/barrel. Legislation introduced in the 114th Congress (H.R. 4559) would have created a commission to investigate OPEC anticompetitive practices. Current oil market conditions are similar, but with the addition of demand weakness being magnified by COVID-19. Other previously considered policy options that might support U.S. producers include:
Low oil prices reflect a global market that is projected to be oversupplied in the near-term. Price recovery would largely depend on market rebalancing. However, the rebalancing timeframe is uncertain as demand impacts of COVID-19 and actual oil supply increases are unknown. Rebalancing could take the form of OPEC+ supply restraint, price-induced demand increases, lower U.S. and global oil production, or a combination thereof. Existing federal policy options that might contribute to balancing near-term global markets appear limited.
