Nationalizing the United States Oil Industry


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Abstract

Falling oil prices and a surge in green energy policies have breathed new life into an old idea: to nationalize the fossil fuel industry. The problem is, nationalizing oil and gas would be a radical step, and alone it would not be enough to deliver a comprehensive energy transition that can meet climate goals as well as the social objectives of the Green New Deal. While calls have been made to nationalize oil and gas development in the U.S., the inefficiency of government oversight cannot do a better job than private enterprise at developing and managing these natural resources.


Key Points

  • The Green New Deal outlines a plan, potentially costing $1 trillion, to bring U.S. greenhouse gas emissions to net-zero while meeting 100% of power demand in the country using renewable, zero-emissions sources by 2030. It does not explicitly call for eliminating fossil fuels, but legislation would have a major impact on the oil and gas industry.

  • Recent political calls for more ESG policy, low oil prices, plus the large amount of debt maturing for oil companies over the next 7 years is the basis for proponents of oil nationalization. Activists believe reducing current greenhouse gas emissions 87% by 2050 is not possible with forced production curtailments. Forty U.S. shale oil companies currently have $71 billion in debt coming due by 2027, generating the argument for government consolidations following bankruptcy.

  • Three major outcomes are possible for oil companies following the most recent downturn:
  • 1. Oil demand may recover which will result in “business as usual” and an economic recovery for oil producers.
  • 2. Supply and demand will remain out of sync causing multiple bankruptcies and consolidation between companies until prices recover.
  • 3. Oil will remain depressed long enough that major oil companies cannot survive and the federal government must step in to keep the industry afloat, resulting in possible nationalization of the oil industry.

  • A government buyout of all public oil and gas companies in the U.S. would cost $700 billion. This number does not include issues related to privately owned minerals, lawsuits and lobbying efforts, or private equity backed firms that would not be for sale.

  • Domestic oil and gas companies already have plans for reducing their carbon footprint. A government run national oil company would not be as efficient as private enterprise for managing and developing natural resources. The end result would leave the U.S. dependent on foreign energy sources with those nations leaving as the only winner instead of the climate or domestic workers.


Introduction

Falling oil prices and a surge in green energy policies have breathed new life into an old idea: to nationalize the fossil fuel industry. Before the COVID-19 pandemic, the basic argument was that nationalization could expedite the phasing out of fossil fuels in order to reach climate targets while ensuring opportunities for workers in coal, oil, and gas to join other industries. The case for nationalization has gotten stronger in recent months. The share values of large fossil fuel companies have tanked, so the argument is that it is a good time for the federal government to buy. In April 2020, FastCompany estimated that a 100% government buyout of the entire sector would cost $700 billion, and a 51% stake in each of the major companies would, of course, be considerably less [1]. The problem is, nationalizing oil and gas would be a radical step, and alone would not be enough to deliver a comprehensive energy transition that can meet climate goals as well as the social objectives of the Green New Deal. 


Green New Deal

The term “Green New Deal” was first coined by Pulitzer Prize-winner Thomas Friedman in January 2007 when America had just experienced its hottest year on record and Friedman recognized that there wasn’t going to be a palatable, easy solution to climate change as politicians hoped [2]. He realized it was going to take money, effort, and upsetting an industry that has always been very generous with campaign contributions – the fossil fuel industry. As written, the Green New Deal is now more a list of ideas and ideals than an actual proposal, although the new climate change regulations suggested could run up to $1 trillion [3]. What was entered as official legislative language on Capitol Hill declares the government should take a stronger position on everything from cutting carbon emissions to giving every American a job, including working with family farmers and retrofitting every building in the country. The main goal of the plan is to bring U.S. greenhouse gas emissions down to net-zero and meet 100% of power demand in the country through clean, renewable, zero-emission energy sources by 2030 [2]. The Green New Deal also calls for the creation of millions of jobs to provide a job guarantee to all Americans, along with access to nature, clean air and water, healthy food, a sustainable environment, and community resiliency [2]. While the deal does not explicitly call for eliminating fossil fuel usage, it would hit the industry hard. 


Arguments for Nationalization

Calls to nationalize the fossil fuel industry have been around for decades but again started mounting soon after President Donald Trump took office when he began rolling back the emissions regulations enacted during Barack Obama’s two terms in the White House. While history is littered with dozens of examples of governments taking command of oil production, particularly during times of turmoil, none have attempted what environmentalists now propose in the United States: a take over of the oil industry to euthanize it [4]. The desire to execute one of the largest economic industries in the United States originates in the aggressive stance of the Green New Deal and is even more enticing with the industry’s looming debt problem. United Nations scientists published a 2018 report that projected the only hope of keeping global warming within 1.5°C above pre-industrial levels, roughly half a degree hotter than average temperatures today, was slashing global emissions in half by 2030 [4]. The finding jolted the global debate over climate policy and put in plain terms the unprecedented economic changes required to avert “catastrophic warming,” including reducing the percentage of global energy coming from oil by 37% by the end of this decade and 87% by 2050 [4]. Environmental activists insist that when left to free market principles, these levels of reduction seem unachievable unless production curtailments are forced. The only way to force such carbon reductions is to control oil and gas production. 

Figure 1: Debt Obligations Of 40 United States Shale Companies [11] 

The second issue making a nationalized United States Oil Company more palatable lies in the industry’s uncontrollable debt problem. Sold on the promise that improving efficiency would eventually yield big profits, investors on Wall Street gave shale drillers improbable quantities of cash for nearly a decade after the last recession, loading companies up with the debt made possible by federal policy responses to it [6]. As a result, the U.S. oil and gas sector is currently mired in a chronic debt crisis springing from the debasing of asset values tied to oil prices. Figure 1 shows the anticipated outstanding debt and interest for 40 U.S. shale producers maturing between now and 2048. In this nearly thirty year period, about 64%, or $71 billion, of debt associated with these shale companies is due within the next seven years. The combined impact of global oversupply of oil and gas before the pandemic and a massive slump in demand as a result of lockdowns has created this economic fallout. A bailout of a once-thriving industry that needs some help during a downturn is one thing, but the industry has failed to produce positive cash flow even when oil prices were much higher [6]. The bottom line is: in the 15 years since the first U.S. shale boom, the industry as a whole has failed to return a profit. With debt maturing in the near future and little to no cash flow to even cover the interest, a massive wave of bankruptcies has already started to creep into the industry. 


Scenarios for Nationalization

It is well documented that in both World Wars the U.S. government did not shy away from seizing control of industries deemed crucial to the war efforts. This included the nationalization of the railroad system, telegraph, telephone and radio networks and manufacturers during World War I, and then coal mines, oil companies, refineries, and even a department store in World War II [5]. Right now, the price of oil is too low to justify the cost of extraction for many wells; it is simply uneconomic. As a result, companies are losing revenue and are struggling to keep their heads above water. Many have cried out for government support, but the oil and gas industry cannot be bailed out in the same way as the Big Three auto companies in 2008. Extending companies’ liquidity so that they can restructure and position themselves for the economic recovery will not matter if global oil and gas prices remain below production costs for a protracted period [1]. This is where nationalization could come in. 

For the U.S. fossil fuel industry, three outcomes seem possible. First, global energy demand might recover quickly, taking us back to business as usual marked by higher prices and, of course, higher emissions levels [4]. With global demand quickly on the rise, this scenario seems likely but with expedited green energy policies in the imminent future supported by the Green New Deal, this option is downgraded to plausible. Second, the supply/demand imbalance will persist thus triggering a wave of bankruptcies and industry consolidation [4]. According to Bloomberg, as many as 70% of the 6,000 shale drillers could go bankrupt if commodity prices remain too low to cover costs or service debt [7]. A handful of larger corporations might then buy up the assets of the smaller ones. This scenario is also incredibly likely as it has been what the industry has seen in the past few months. With dozens of bankruptcies and several major mergers in the industry, consolidation might just be the future. Third, the global levels of demand will remain depressed for a longer period, forcing some of the larger (major) companies into asset sell-offs or bankruptcy [1]. This outcome with protracted losses and widespread bankruptcies, could force the federal government to consider nationalization [1]. 


What Happens Next 

By taking fossil fuel companies under public ownership while they’re cheap to buy, the U.S. could ensure the country’s energy demands are met responsibly as it transitions to a net-zero-emissions economy, without the need to appease those companies’ shareholders [6]. The share values of large fossil fuel companies have tanked, so this would be a good time for the federal government to buy. As stated earlier, in April 2020, it was estimated that a 100% government buyout of the entire sector of publicly traded companies would cost $700 billion, and a 51% stake in each of the major companies would be considerably less [1]. The so called “51 Percent Solution for the Climate Crisis” was coined by the Democracy Collaborative’s Carla Skandier and is a policy in which the government takes a majority stake in publicly owned fossil fuel firms, winds down production along a science-based timeline, and gives workers a dignified off-ramp into other well-paid work; all the while muting the industry’s enormous influence over the political system [6]. With a majority control over domestic operators, the government would be able to phase out the oil and gas industry in the United States in favor of green, low-carbon energy solutions. 

Even if the government were able to acquire a 51% stake in major publicly traded oil companies, there would be additional hurdles for nationalization to truly occur. Legal issues would be the biggest problem faced by the U.S. government out of the gate. The United States is one of few countries that allow individuals and businesses to own mineral rights. The concept of nationalizing oil and gas companies in order to end fossil fuel production also impacts the revenues and value of private mineral owners. Unlike other countries where the government owns the national oil company and all of the minerals, the government intentionally devaluing the property of mineral owners could open the door for potential litigation. Another issue arises with private oil and gas companies. Since they are not publicly traded, the government cannot gain control through buying a majority equity stake on a stock exchange. These companies would be able to continue producing oil and gas unless policy changes limiting their operation were also put in place. At that point the government would be inhibiting the free market and further stifling innovation.

The reality is the U.S. economy will continue to consume large volumes of coal, oil, and gas for the foreseeable future. Until low-carbon energy and energy conservation can be scaled up, an accelerated phaseout of fossil fuels domestically would simply mean the United States will import more energy from overseas [4]. Therefore, if large parts of domestic production were to permanently come offline, then global prices will increase and the winners will not be the climate or workers. It will be the current competitors to the United States overseas. If nationalization is going to serve both workers and the climate, proponents will need to accept that a phaseout of oil and gas is not a ten-year proposition [1]. The transition to a low or zero-carbon energy system will take considerably longer than a decade since the entire economy has been built around fossil fuels, and it is impossible to transition all of the infrastructure in such a short amount of time. 

Figure 2: BP’s Steps To Reach Net-Zero [12]

Luckily, this process has already begun with “Big Oil’s Net Zero Club”. Companies like BP, Shell, Repsol, and Total are leading the charge signaling the recognition of the energy transition by pledging to cut emissions to “near zero” by 2050. According to the Grantham Research Institute on Climate Change, net zero means “achieving an overall balance between emissions produced and emissions taken out of the atmosphere” [10]. This means reducing total emissions to as close to zero as possible and then using various strategies to remove any residual emissions. In order to be more sound in defining carbon reductions, the Science-Based Targets Initiative (SBTi) has become known as the gold standard for setting Paris-aligned targets. To ensure the path to net-zero is grounded in science, the SBTi will soon release the first global standard for credible, corporate science-based net-zero targets [11]. While setting a science-based target through the initiative’s sector-based approach is not yet an available option for oil and gas companies, these handful of supermajors described above are taking important leadership positions on greenhouse gas emission reductions to ensure progress towards a worldwide net zero.


Conclusion 

The idea of nationalizing the fossil fuel industry in the United States is solely centered around the implementation of climate policies. The problem is, domestic oil and gas companies already have plans in place to reduce their carbon footprint. Therefore, bringing an entire industry under the control of a government entity will eliminate competition and be run as a government institution – by favoring taxpayers and not the shareholders [8]. Putting the shareholder first is what spurred innovation to push the industry to new heights and is what will force the fossil fuel industry to lead the charge towards an eventual de-carbonization. Nationalization alone will not solve the crisis, but it’s a crucial tool to consider if the government forces a program of crash de-carbonization, particularly in ways that protect workers and communities dependent on extraction [9]. It would be a radical step that goes against progress and would still not be enough to deliver a comprehensive energy transition that can meet climate goals or the social objectives of the Green New Deal. 

While calls have been made to nationalize oil and gas development in the U.S., the inefficiency of government oversight cannot do a better job than private enterprise at developing and managing these natural resources. In addition, a crash de-carbonization will leave the United States dependent on foreign energy sources since low-carbon, green energy sources will not be able to sustain current domestic energy demand within the next ten years. Some version of the Green New Deal may become a reality over time, but it will not be quick or easy and will require the continued development of domestic resources by the oil and gas industry under free-market conditions.  


References 

[1] https://www.jacobinmag.com/2020/08/nationalize-fossil-fuels-green-new-deal-big-oil

[2] https://www.investopedia.com/the-green-new-deal-explained-4588463 

[3] https://www.cnn.com/2019/02/14/politics/green-new-deal-proposal-breakdown/index.html 

[4] https://grist.org/energy/falling-oil-prices-breathe-new-life-into-an-old-idea-nationalize-the-industry/ 

[5] https://www.resilience.org/stories/2019-08-20/time-has-come-to-nationalize-the-us-fossil-fuel-industry/

[6] https://newrepublic.com/article/156941/moderate-proposal-nationalize-fossil-fuel-industry

[7] https://www.bloomberg.com/news/articles/2020-03-27/-rocks-don-t-go-bankrupt-experts-say-shale-shall-rise-again 

[8] https://seekingalpha.com/article/124250-pros-and-cons-of-nationalization 

[9] https://thenextsystem.org/learn/stories/out-time-case-nationalizing-fossil-fuel-industry

[10] https://www.asyousow.org/blog/2020/9/8/net-zero-oil-gas-club 

[11] https://www.ogj.com/drilling-production/production-operations/unconventional-resources/article/14040625/rystad-energy-us-shale-bankruptcies-not-industrywide-epidemic 

[12] https://www.bp.com/en/global/corporate/sustainability/climate-change/our-role-in-the-energy-transition.html 

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