The U.S. Oil Industry Was Already Struggling Before the Saudi-Russian Price War

Texas's oil industry was already having a tough time since the coronavirus crisis reduced demand. With the Saudi price war, some companies may find it hard to endure if prices stay low.

ARI SHAPIRO, HOST:

Now to the fallout from this week's collapse in crude oil prices after Saudi Arabia and Russia entered into a price war. The U.S. produces more oil than any other country, so it has a lot at stake. And the industry already faced challenges before this latest blow. NPR's Jeff Brady is in the oil boomtown of Karnes City in South Texas.

Hi, Jeff.

JEFF BRADY, BYLINE: Good afternoon.

SHAPIRO: What are you hearing from people there?

BRADY: Well, you know, people are already seeing effects of the price drop this week. Companies - they're starting to cut back, knowing that they'll have - be bringing in less money for every barrel of oil they sell. I went to a popular cafe this morning in Karnes City, where people were enjoying tacos and coffee for breakfast. And there I met Rudy Martinez. He has a business renting out rooms to out-of-town oil field workers. He lost a couple of lodgers this week because they were laid off.

RUDY MARTINEZ: It's just a small man camp. You know, they pay - they get per diem. Workers get their per diem, and I charge them a hundred bucks a person. Actually, I'd like to charge them a little more than that. But now that it's tapered off, it's hard to charge them that because they can't pay it.

BRADY: For a few - for those few workers left, Martinez charges them that hundred dollars every week. He says when Karnes City was really booming, he could charge $2,000 a week...

SHAPIRO: Wow.

BRADY: ...So a big difference there. Yeah. And that's just one local effect of the lower oil prices. Across the industry, many expect more bankruptcies, especially for those smaller companies that took on a lot of debt and won't have the money to pay that debt back.

SHAPIRO: OK, so take us through what's happened. We know OPEC and Russia tried and failed to reach an agreement last week to cut oil production and boost prices. What happened then?

BRADY: Well, Saudi Arabia, the largest producer in OPEC, vowed to produce even more oil at a deeper discount. The kingdom can do that because its oil is very cheap to produce - less than $10 a barrel. Here in Texas, the price today was about $33 a barrel. I talked with a local banker. Trip Ruckman is his name. He says companies need prices between $40 and $60 here in Texas to make a profit. But he says they can't stop drilling just overnight. Most of them made their plans a year ago, and it can take companies time to cut back.

TRIP RUCKMAN: Probably in a few weeks to a month or two, I think you're going to see a few things slow down. But we'll still be here. We were here before the oil (laughter).

BRADY: And on top of this, people around the world are canceling travel because of the coronavirus. The world just had a record warm winter. All that reduces demand for oil, so U.S. companies were already facing challenges. And now this price war is making the situation much worse for them.

SHAPIRO: There have been some reports that the Trump administration might be willing to help the oil industry through this period. What could the government do?

BRADY: You know, we haven't seen any specifics yet from the administration, but the White House could lower federal royalties for oil pumped on federal land or offshore. The administration could choose to buy oil to reduce supply out on the market and then store that oil in the Strategic Petroleum Reserve. There's also talk of low-interest loans for the industry. But the fossil fuel industry - you know, it makes a significant contribution to the greenhouse gases that lead to climate change, so the idea of subsidizing this industry more than the country already does - there's a lot of opposition to that.

SHAPIRO: Do these low oil prices mean low gas prices for drivers?

BRADY: They do. In fact, I'm sitting in front of a gas station right now. I saw them lower the price about five cents a couple of hours ago, down to $1.97. And that's cheaper than most of the country. But it's going to take a while for those cheaper gasoline prices to move out across the country...

SHAPIRO: All right.

BRADY: ...As soon as this oil goes through the refineries.

SHAPIRO: NPR's Jeff Brady in Karnes City, Texas; thank you.

BRADY: Thank you.

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