” … legislatively blocking oil imports would also disrupt oil exports from the U.S., which means some producers win and others lose. Trying to untangle ‘good’ imports (such as from Canada and Mexico) from ‘bad’ imports (Saudi Arabia and Russia) is all but futile given the fungibility of oil and trading patterns that can recolor the oil.”
History rhymes regarding the economics and political economy of the U.S. oil market. Today, it is Harold Hamm and the 34-company trade group Domestic Energy Producers’ Alliance (DEPA). Yesterday, it concerned a petition from 12 independent producers about unfair, below-cost oil sales by foreign companies (see “Oil and Those Slippery Anti-Dumping Laws” New York Times, August 5, 1999, reprinted below).
Twenty-one years but the same issue: too much supply relative to demand to drive prices down.
On March 12th, Domestic Energy Producers’ Alliance announced support for an anti-dumping investigation and finding by the U.S. Department of Commerce and the U.S. International Trade Commission. In the face of $30 per barrel oil, DEPA’s press release stated:
The petition will seek a determination that the recent actions taken by Saudi Arabia, Russia, and others to unreasonably increase their supply of crude oil at prices below market value will result in material injury to the U.S. domestic crude oil industry.
A March 19th press release, Domestic Energy Producers Alliance Asks Commerce Secretary to “Step Up”, begins:
It is time for Secretary Wilbur Ross and the Department of Commerce to step up and launch a Section 232 investigation into Saudi Arabia and Russia dumping crude oil on the world market while also selling their crude below market value. This action was undertaken during the current Coronavirus Pandemic and resulted in a collapse of world crude oil prices.
Referencing a letter from Oklahoma Senator Jim Inhofe to Secretary Ross on “market manipulation” by Saudi Arabia and Russia, DEPA’s press release continues:
Section 232 and the Mandatory Import Program: Since 1955, Section 232 and its predecessor statute have been used on numerous occasions to address energy security concerns. Presidents Eisenhower, Kennedy, Johnson, Nixon, Ford, Carter and Reagan have all invoked Section 232 as a basis for restricting oil imports or for modifying existing restrictions thereon. Section 232 investigations are initiated to determine the effects of imports of any articles on U.S. national security.
Most recently, after negative pricing became the talk of the nation, DEPA chair Harold Hamm requested an investigation by the Commodity Futures Trading Commission (CFTC) into pricing for West Texas Intermediate (WTI) oil conducted by the CME Group (formerly Chicago Mercantile Exchange)
for possible market manipulation, failed systems or computer programming failures in the WTI prompt month May (20), and oil futures contracts on the CME. Continental has also lodged a complaint with CME. As shown below, the unprecedented, historical event of WTI crude oil trading at negative prices for the first time in history and the circumstances surrounding the trading shows the system failed, negatively impacting a significant part of the American economy. Not only did WTI crude futures trade negative, they settled at a bizarre minus $37.63.
The WTI prompt month May (20) contract price settled at $18.27 per barrel on April 17, 2020. On April 20, 2020, the WTI prompt month May (20) crude oil contracts closed down $55.90 or 306% at a minus $37.63 per barrel. Notably the CME chose to announce on April 8, 2020 that it had been testing plans to support the possibility of negative options such that if any month, WTI oil futures settle at a price between $8.00 and $11.00 a barrel that it could switch to a different pricing model that would allow for negative pricing.
Undeserved Problem, Wrong Response
The unprecedented collapse of transportation demand (oil’s primary market) from COVID-19 and government stay-at-home orders certainly offers a new precedent for both industry and public-policy reform. But legislatively blocking oil imports would also disrupt oil exports from the U.S., which means some independent producers win and others lose. Trying to untangle ‘good’ imports (such as from Canada and Mexico) from ‘bad’ imports (Saudi Arabia and Russia) is all but futile given the fungibility of oil and trading patterns that can recolor the oil.
It is best that the Department of Commerce pass on this Section 232 request.
Regarding the methodology of WTI pricing for future delivery, that is a matter for the trading industry and its exchanges to consider outside of the governmental CFTC.
Appendix: Section 232 Request: 1999
“Oil and Those Slippery Anti-Dumping Laws.” (August 5, 1999)
“On Monday [August 9, 1999], the Commerce Department is scheduled to weigh in on a trade dispute that a number of economists say could take the country’s fair-trade laws to new heights of absurdity,” the article by Michael Weinstein began.
Twelve independent oil producers that take nearly depleted wells from major oil companies and pump out the last remnants have accused Saudi Arabia, Mexico, Iraq and Venezuela of selling oil in the United States for less than what they spend to produce it. That is a violation of the trade rules that is known as dumping. The plaintiffs are calling for the United States to impose taxes of up to about 170 percent of the price of oil imported from these countries.
The weak public-interest rational was next explored:
Economists often mock anti-dumping laws because they punish foreigners for doing something kind for consumers: selling products at low prices. Dumping would be a genuine threat if foreigners could credibly drive American competitors out of business in order to take over an industry and raise prices later on. But such cases occur rarely, if ever. In the case of oil, the dumping accusation makes even less sense.
Oil is a commodity that is priced in a world market. One producer, even if willing to absorb losses for a time by selling at below-market prices, could never expect to recoup its losses by raising prices above market levels in the future. Other suppliers would strip away its customers.
Moreover, it is hard to make the case that dumping is occurring when one of the accused exporters, Saudi Arabia, spends only about $1.50 or so to produce a barrel of oil that sells for about $15.
Economists point out other holes in the dumping charge. The oil market is worldwide. It does not matter whose oil goes where. A tax slapped on four oil exporters will drive down imports from them. But it will not drive down imports over all. Other exporters will take up the slack.
Oil that Saudi Arabia would have sent to the United States will go instead to Europe; oil that Kuwait would have sent to Europe will come to the United States. Once the markets figure this out, oil supplies and prices will not change very much. ”Victory,” said Philip K. Verleger, an economist for the Brattle Group, a consulting firm in Cambridge, Mass., ”cannot help domestic producers.”
The article then goes into the pro-domestic bias of U.S.-side anti-dumping law.
For example, it is a common practice during times of economic slack for United States companies, including oil companies, to cut prices simply to generate enough cash to cover their operating costs even if they lose money over all. This is perfectly legal. But when foreign companies engage in similar price-cutting, even as a defensive move to meet prices charged by concerns in the United States, they end up violating anti-dumping laws.
… under the law, the Commerce Department does not even have to establish that Saudi Arabia’s price falls below production costs. Instead, it need only find that Saudi Arabia charges less in the United States than it does somewhere else. The plaintiffs say that Saudi Arabia sets lower prices in this country than it does in Japan. Maybe so. But how that practice harms the United States, or proves that Saudi Arabia is selling oil below its cost, remains unexplained.
The article concludes by discussing the anti-consumer nature of the law and complaint and how it all comes down to politics, not economics:
Low-price imports benefit hundreds of millions of consumers, but threaten a small number of domestic producers, driving them to seek cover from Congress…. Indeed, if there is any reason for thinking that the Government might side with consumers this time, it is that the Commerce Department’s normal anti-import stance could cause Vice President Al Gore severe embarrassment. He no doubt wants to kick off his Presidential campaign with something other than an announcement from the Administration that it thinks Americans don’t pay enough at the gas pump and the home heating depot.