April 2020 /// Vol 241 No. 4

Special Focus

Guest Commentary: Railroad Commission can help to solve overproduction in tandem with other entities

Kevin Arnold, K Arnold Consulting

I worked for a major oil company in Crude Oil Supply Planning during the 1960s, when proration of oil production in Texas, Louisiana and Oklahoma was in effect. Proration worked, because the federal government under President Eisenhower, a Republican, decided that a viable domestic oil industry was vital to the economic health and security of America. 

Each month, the government limited imports of oil east of the Rockies (Petroleum Administration for Defense Districts 1 to 4) to 20% of demand, by issuing import tickets to every refinery, to allow them to purchase 20% of crude runs for the coming month.

Each state also set a “percent allowable” for each well to assure that demand would be met.  The 100% allowable production was determined by the depth of the well, as a proxy for cost to the operator. Some wells had to be throttled back, and some could not produce their percent allowable. The Railroad Commission and others had the statistical background to forecast all this, in setting the percent allowable for the coming month. 

Refineries that could not import crude oil were able to sell their tickets to those that could.  The marketplace established the value of a ticket as the difference between the lower price of Middle Eastern crude versus the higher price of U.S. crude.

Today, the Texas Railroad Commission, working with the federal government, could negotiate with OPEC and others to guarantee that the U.S., for the next period of time (say five years), will not be a net exporter of crude.  The U.S. would import 20% of demand, but only if OPEC and others adjust their output to maintain a specified crude price—perhaps in the $40-to-$60 range, to be adjusted annually. The price should be low enough to stabilize the world economy, but high enough to encourage sensible green development.

Ken Arnold

President

K Arnold Consulting, Inc.

Houston, Texas  

The Authors ///

Kevin Arnold Kevin Arnold is the President of K Arnold Consulting.

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