(Bloomberg Opinion) — Calls for the Trump administration to provide financial aid for frackers have drawn denunciations of socialism. If anything, with oil trading around just $31 a barrel, the critics don’t go far enough. Because directing state resources into producing yet more of a thing manifestly not in demand isn’t just socialism; it’s the Soviet-grade, tractor-quota good stuff.
There is nothing wrong per se with government stepping in as a last resort when crisis threatens a vital segment of the economy. But you need a clear understanding of what the crisis is, what’s vital and what the objectives are.
In the case of the U.S. exploration and production business, to say the current predicament is the fault of Saudi Arabia or a virus is to cite catalysts rather than the underlying pathology.
Consider Continental Resources Inc.: Founder and majority shareholder Harold Hamm told Bloomberg TV on Wednesday he had “reached out” to the Trump administration and wants it to take action to prevent cheap Russian and Saudi Arabian barrels flooding the U.S. to the detriment of the domestic industry. Yet Continental should look to itself. Its guidance — which envisages growing production in a market that was oversupplied even before coronavirus struck — implies free cash flow going to zero this year if oil averages about $48. As of now, 2020 swaps trade around $34. Only last summer, the company was buying back shares at an average price of about $34 apiece. They are now below $9.
The shale oil boom of the past decade (and natural gas before that) has come with a hefty dose of moral hazard built on various assumed market puts.
One was OPEC’s willingness to keep its own barrels offline to prop up prices. It’s worth remembering that in 2016, when Hamm was then-candidate Donald Trump’s energy…
Source: FuelFix
