The Texas Railroad Commission must tap the brakes on oil and gas production

It’s time for the Texas energy regulator to step into its historic role of setting regulations that keep the industry healthy.

 By James Coleman on Jan 5, 2020  dallasnews.com/opinion/commentary

Texas is now the center of history’s biggest oil and gas boom. This boom, like past booms, is cementing the U.S. as the world’s superpower. But as in those earlier booms, our regulators may need to slow production slightly to preserve our natural resources and the health of our oil industry.

Texas producers are now draining so much oil and natural gas that there aren’t enough purchasers to use all of the gas. Oil and gas often come from the same well. The industry sells the oil but cannot build pipelines fast enough to get all the new gas production to distant gas consumers. As a result, producers are burning off, or flaring, more and more gas — wasting this clean burning gas, which is prized by consumers and industry around the world.

The U.S. Energy Information Administration recently reported that the U.S. is flaring more gas than ever before. Texas alone now flares more gas than many states use. These flares, burning round-the-clock, can be seen from space — nighttime satellite pictures make the Permian Basin look like Texas’s biggest metropolis. This tremendous waste of resources is sparking both public concern and private lawsuits, with regulators, landowners and the industry all pointing fingers at different villains. But for solutions, Texas need only look to its past.

The Railroad Commission of Texas, despite its name, is the world’s premier oil and gas regulator. During the 1930s, Texas dominated oil production to an extent never equaled, pumping as much as a quarter of the world’s oil. During that oil boom, the Railroad Commission learned an important lesson: Sometimes to maximize the value of an oil bonanza, you have to slow it down a little.

Everyone knows that as oil production rises, the price of oil falls. But individual companies can’t do anything about that. Instead, they have to take what they can get for their oil, find ways to produce more for less, and hope for higher prices. But a dominant regulator can help all companies by slowing down all production a bit. As production slows, prices rise, benefiting all companies.

In 1931, the Railroad Commission changed the oil industry forever when it began limiting oil production to ensure higher prices. Companies tried to evade these limits and cheating on the limits became more profitable as prices rose. Texas eventually had to send in the Texas Rangers and the National Guard to enforce the law. But when the limits were enforced, oil companies benefited. They sold slightly less oil, but received substantially higher prices. Ever since, the Railroad Commission’s limits on oil production have been used as a model by dominant commodity producers around the world.

Today, the Railroad Commission has far less influence on Texas oil prices. Our global oil market means that local prices depend on supply and demand around the world. But the commission can shape Texas gas prices. There aren’t enough pipelines and gas export facilities to bring the new flood of gas to market, so local prices are very dependent on local production. Modest reductions in local production can lead to substantial prices increases. Such limits could benefit all producers and preserve Texas’s natural resources until they can be brought to market for their full value.

The Railroad Commission should moderate the pace of the current boom to ensure that Texas gets full value for its gas. It could reject some new flaring permits, although that kind of all-or-nothing regulation might be unfair to the rejected companies. It could also impose modest limits on gas production, forcing all companies to slow their production and also ensuring higher prices for all. The commission is properly cautious about intervening in one of the free market’s biggest energy success stories. But careful regulations can build on the commission’s legacy of using production limits to ensure the long-term health of the oil and gas industry.

James Coleman is an associate professor at Southern Methodist University’s Dedman School of Law in Dallas and publishes the Energy Law Professor blog. He wrote this column for The Dallas Morning News.