For 50 years, economists and policymakers in oil-consuming countries have railed against OPEC, or the Organization of the Petroleum Exporting Countries. Time and again, the organization has cut supply to boost prices. Often, lawyers and government officials have written that the OPEC nations were violating antitrust laws and would be prosecuted were they companies.
Today OPEC has become OPEC&C: the Organization of Petroleum Exporting Countries and Company. The nations remain the same. However, the organization seems to have been joined by at least one U.S. company: Pioneer Natural Resources.
Pioneer’s CEO told Bloomberg on April 14 that “U.S. shale producers risk another oil-price war with OPEC and its allies if they resume the breakneck production growth of the last decade.” The article continued,
Shale, and not the pandemic, was responsible for the initial oil-market crash of 2020, Chief Executive Officer Scott Sheffield said at BloombergNEF’s annual summit. The cartel, frustrated at U.S. producers’ success in taking market share from OPEC, allowed prices to tumble, he said.
“OPEC and Russia were upset that we grew too much,” said Sheffield. “If we ever start growing again too much, we’re going to have another price war.”
Sheffield added, “If we grow another million barrels a day next year, we’re going to have another price war in my opinion going into 23 .”
To an economist trained to value free markets, these words are heresy. The goal of the corporation is to grow. The goal of policymakers is to build a larger and more secure economy.
Ordinarily, statements by executives such as Sheffield can be ignored. They constitute “signaling.” Signaling is defined by Render, McDonald, and York as “a firm’s unilateral statement on competitive topics, likely to be heard by a competitor, but without an agreement.” Signaling violates U.S. antitrust laws.
Sheffield has clearly signaled other U.S. oil producers not to boost production because he fears higher U.S. output will depress prices. He did it on April 14 and on earlier occasions.
However, Sheffield has gone further. On April 2, Pioneer Natural Resources announced a $6.4 billion acquisition of a competitor, DoublePoint Energy. As S&P Platts’ Starr Spencer reported,
Upon closing in mid-to-late second-quarter 2021, Pioneer will slow DoublePoint’s production growth, moderating it — a benefit to the U.S. shale industry whose producers have mostly renounced galloping crude oil output in an attempt to avoid price volatility. At the same time, the deal still generates optimum value for Pioneer, the executives said.
The article continued,
DoublePoint’s drilling activity will be chopped from seven rigs currently to five by year-end 2021 and potentially lower, reducing its growth rate from 30% or more in 2021 to a rate more consistent by 2022 with Pioneer’s own 5%/year rate, Dealy said. [Dealy is Pioneer’s chief operating officer.]
“The plan is to keep [DoublePoint’s] production relatively flat at 100,000 [barrels of oil-equivalent per day] during the second-half 2021,” he said.
A large number of oil producers have pledged to limit their crude output to the low double-digit percent yearly, from what was often 30% or more per year. Double-digit production volumes have sometimes contributed to lower oil prices that fell below the [$50-per-barrel] level — considered to be a profitable level, below which some U.S. producers’ shale operations are not economic.
The article goes on to explain that Pioneer has “peer-leading oil price breakevens for its operations in the [Permian Basin geologic formation] in the high $20s [per barrel].”
One does not need to read between the lines to understand Pioneer’s action. The company is buying a competitor to reduce its output. The purpose of the purchase is to prevent prices from declining. The pledge by Pioneer and other companies could be interpreted as signaling by antitrust authorities.
The U.S. Department of Justice and Federal Trade Commission should take note of Pioneer’s statements and intentions. In my view, Pioneer is effectively joining with OPEC to raise prices. Such actions are illegal under U.S. law. The merger should be blocked. Further, Sheffield should be investigated for signaling.
Pioneer’s efforts to support oil prices by limiting capital expenditure are particularly disturbing because these activities could increase Russia’s revenues. In the last week, Russian President Vladimir Putin called the United States an adversary over our efforts to preserve democracy in the Ukraine. It is very odd to see the CEO of an American corporation apparently taking actions that may benefit Russia, which derives most of its revenue from oil sales.
Photo by Zbynek Burival on Unsplash