Q&A: LSU Energy Studies Director Explains What The Oil Crisis Means For Louisiana

Mar 10, 2020

Oil prices crashed earlier this week following Saudi Arabia’s decision to ramp up production amid lagging demand as a result of the coronavirus.

David Dismukes, the Director of Louisiana State University’s Center for Energy Studies, talked with New Orleans Public Radio about the impacts of the oil crisis on Louisiana’s energy sector.

Betsy Shepherd: Can you give a summary of what happened as stock prices dropped and the role of oil in that stock market plunged?

David Dismukes: This is the consequence of some actions that started late last week and worked their way through the weekend. Now with this coronavirus, it’s raised some concerns about whether or not the market has been oversupplied. The Saudis were trying to get the Russians to come on board with an additional cut in production. The Russians didn’t want to play along with that, and the Saudis have taken an action of essentially wanting to play chicken with the Russians on this issue and decided that they’re going to be discounting their crude oil supplies and enhancing production and flooding the market to increase their own market share at the Russians expense. You take that into conjunction with what’s been going on with the coronavirus and the contraction of economic activity and the reduction of demand that we’ve seen over the last several weeks. That just makes for a catastrophic market for a commodity like crude oil.

Can you put in perspective how bad the situation is right now in terms of the ups and downs of the stock market?

Something similar to this happened back in 2014. The Saudis went in and tried to flood the market then and prices did collapse. I think we got down to $26 a barrel. This is not as bad as that situation but one thing that makes it different is that back then you had a much healthier U.S. oil and company financial position than you have today. Many of those companies were able to ride that out until prices started to regain their footing. We’re not going to be able to do that this time around. There is no fatness [in the] industry anymore, it is about as lean as you can possibly get. Many of these companies have been tottering on a very line, financially. This is just going to push a lot of people over the edge. It’s just a matter of when, not if.

Louisiana’s economy is heavily dependent on the energy sector. Can you talk about some of the local impacts on industry and the job market?

It will impact different industries in different ways. If you’re in the exploration and production side of the business, it’s going to be very tough to manage. This could be as bad as 1986. There will be very few economic opportunities to go and put drill bits in the ground. At those prices, you just can’t sustain that activity.

If you’re in the service sector and you’re supporting those kinds of companies, you’re also going to be immediately hard hit as a consequence of this because the first thing that’s going to go for most of these companies is their drilling budgets, because they’re going to need to conserve cash to survive and to make their interest payments and their debt payments, so the service sector is going to be someone that gets pretty hard, as well.

If you start thinking about the refineries in this state as well as the petrochemical companies, even though this will mean lower feedstock cost for them in terms of creating commodity chemical and refined product, there’s so much uncertainty that’s been further exacerbated because of the coronavirus problems that it’s probably going to have a significant impact on overall global energy demand and global economic activity.

Independent oil and gas companies are going to be the ones most immediately impacted by this, but all of them are. I don’t think anybody gets away from this unscathed. Even the big integrated majors are going to feel some pain from this.

Is there any way to stanch the bleeding at the moment?

Not unless the Russians agree to come back to the negotiating table. That would be a signal to the market that would stanch this. I don’t know that it would bring prices back, but it would certainly stop this hemorrhaging right now and might get a little small rebound.