Thank goodness Texas didn't cap energy production
The American energy sector has a lot working against it at the moment. Demand for oil continues to plummet as the COVID-19 outbreak has forced businesses to close and kept Americans inside. Meanwhile, a dispute between Saudi Arabia and Russia has further destabilized global energy markets.
In response to these upheavals, the Texas Railroad Commission recently proposed curtailing the Lone Star State's crude oil production. The Commission recently decided against the proposal.
That was the right move. Production quotas would do little to tame oil markets and could jeopardize the United States' position in the global energy market.
Saudi Arabia picked an awful time to start a price war. The Arab nation flooded the market with cheap oil in an attempt to curtail Russian oil production. Their effort failed, but it delivered a supply shock to global oil markets just as the COVID-19 outbreak caused energy demand to plummet.
Luckily, the two nations just resolved their price war. But as the coronavirus pandemic rages on, global oil demand is down.
The Texas Railroad Commission believed that drastically cutting production statewide could help calm the oil markets and deliver financial relief to energy firms. But despite their good intentions, the Commission's proposal would have backfired.
Government interventions generally lead to disaster. Federal price controls on natural gas caused energy shortages in the 1970s. This energy crisis was so acute in the Midwest that it forced many schools and factories to close. When the government tried to stabilize the market with the Natural Gas Policy Act of 1978, it encouraged production too much and destabilized the market in the other direction.
To make matters worse, it could take years to implement a statewide limit on oil production. By the time a quota system was firmly in place, the COVID-19 outbreak likely will have ended. And Saudi Arabia and Russia have already ended their price war. If firms face government quotas when the market returns to normal, the nation could face massive price hikes and energy shortages.
No matter the circumstances, a quota scheme would harm energy producers. Production limits would punish successful firms while rewarding inefficient companies. Every producer would bear the steep financial costs of complying with the quota.
Worst of all, quotas would upend the free-market strategy that helped the U.S. energy industry succeed up to this point. Over the last decade, the United States has emerged as the world's leading producer of oil and natural gas. We achieved this status through private-sector innovation, not heavy-handed government interventions.
The United States has long criticized countries like Saudi Arabia who keep prices high by restricting the oil supply. If Texas had implemented production quotas, the United States would have lost the ability to criticize other countries for using the same tactics in the future.
The American energy industry has weathered market disruptions before, and it will do so again. Luckily, Texas commissioners chose not to intervene.
Michelle Ray is an Austin-based writer and liberty activist who co-hosts GulchCast with Michelle Ray and Kenny Hitt.