How Covid-19 is forcing the US to rethink its energy policy

The energy department is drafting a plan to pay producers to keep their oil reserves untapped

Fuel storage tanks stand at a PT Pertamina facility in this aerial photograph taken above Tanjung Priok Port in Jakarta, Indonesia on Tuesday, April 21, 2020. Bloomberg

A woman wearing face mask walks past a bank electronic board showing the Hong Kong share index at Hong Kong Stock Exchange Tuesday, April 21, 2020. Asian shares skidded on Tuesday after US oil futures plunged below zero. AP Photo

Oil pumpjacks are seen at the Huntington Beach Oil Fields on April 20, 2020 in Huntington Beach, California. Getty Images/AFP

Shell station employee J.W. West fills up a customers tank with gasoline in Mobile, Alabama, USA, 20 April 2020. EPA

A man walks past an electronic stock board showing Japan's Nikkei 225 index at a securities firm in Tokyo Tuesday, April 21, 2020. AP Photo

The sun sets behind smoke rising from the LyondellBasell-Houston Refining plant in Houston, Texas, on April 20, 2020. AFP

A staff member cleans an electronic stock board showing Japan's Nikkei 225 index at a securities firm in Tokyo Tuesday, April 21, 2020. AP Photo

An offshore platform near the Huntington Beach Oil Fields on April 20, 2020 in Huntington Beach, California. Getty Images/AFP

A kite surfer rides in front of a line up of ships on April 20, 2020 in Huntington Beach, California. Getty Images/AFP

A man sits next to the fearless girl statue next to the New York Stock Exchange on April 20, 2020 at Wall Street in New York City. AFP

The United States, the world's biggest oil producer, has taken a few remarkable detours in terms of its federal energy policy over the last few weeks, as American crude sinks to a record low.

From opposing Opec, to then nudging the exporters' group into a meeting, to signalling US interest in being part of a global pact to cut production, agreements it has criticised in the past, to President Donald Trump pledging to make cuts on behalf of Mexico to secure an oil deal -- American energy policy energy has been clearly one of divergence.

There is now a proposal for the first time by the US energy department to pay American producers to keep their oil untapped as storage capacity in the country and the world nears saturation, demand for crude evaporates and the market deals with an excess of supply.

Here is why this step is unprecedented.

Global storage capacity scenario 

Energy demand is at its worst in a quarter of a century, shrinking annually by one-third in April, according to the International Energy Agency, as countries keep populations under lockdown. However, supply is at a record high in April as Gulf oil producers pumped crude to honour earlier pledges to raise output following the collapse of Opec+ talks in March.

Although oil producers later agreed to curb output, such cuts will only be effective from May, leaving a bulk of new crude headed for storage at a time when tanks and floating storage capacities are filling up.

Opec, which called the demand and supply situation "horrifying", sounded the alarm on depleting storage capacity. If left unchecked, the group estimated that the oversupply would add a further 1.3 billion barrels to global oil stocks, thereby exhausting available global crude storage capacity by May.

The US situation

The US, ahead of the G20-Opec+ meeting, said it was filling up its strategic petroleum reserves (SPRs) as a way to soak up the supply from its independent producers. US energy secretary Dan Brouillette told Bloomberg ahead of the meeting that the country was opening up its SPRs to store as much crude as possible.

"This will take surplus oil off the market at a time when commercial storage is filling up and the market is oversupplied," Mr Brouillette said. Around 77m barrels storage space had been allocated to industry and the energy department was looking at "more opportunities" to ease producers' pain, he said.

US crude stocks at refineries and tank farms, which averaged 375m barrels at the end of last week have filled up 57 per cent of available capacity, according to the Energy Information Authority.

That is likely to increase after West Texas Intermediate, the US oil benchmark, fell to a historic -$40 a barrel before settling at -$37.63 on Monday after trading at $18.27 on Friday.

On Tuesday futures contracts rebounded to trade at $1.35 for May, at $21.13 for June and $26.92 in July at 7:05am UAE time.

Federal action and US mineral rights 

The latest proposal by the US to pay producers to keep their oil in reserves is complicated. The US has a unique set of laws pertaining to ownership of mineral resources that distinguish it from other countries.

Mineral resources such as crude, gas, gold and copper are usually owned by the state in most countries, with the government then launching licensing rounds to allocate concessions to explore and extract these reserves.

However, US mineral rights allow for private ownership of reserves, which has long fostered an entrepreneurial culture in the energy industry. Lack of state interference and ease of ownership allowed the US independents to thrive and changed the dynamics of the industry to become extremely flexible to oil market volatility.

However, state payments towards oil producers, cited by some as a bailout for the hammered US energy industry, could also raise questions about the ownership of these resources in the future.

The payments would be in the billions of dollars and would be expensive for the American economy. The US, which has recently become more amenable to production cuts, could increasingly play a more active role in its energy sector, reversing years of policy to maintain its distance from such industries.