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A truce in the oil-price war could come this week. U.S. energy firms are still bracing for a recession.

The Trump administration wants a deal, but without American production cuts. Is this a replay of 1931?

Pump jacks operate in the oil fields near Midland, Tex. (Larry W. Smith/EPA-EFE/Shutterstock)
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As the belligerents in the oil-price war that has upended global energy markets prepare for talks Thursday, the Trump administration is putting pressure on all sides to strike a deal to cut output even as it rules out parallel American reductions.

Saudi Arabia called for the teleconference in a bid to end its price competition with Russia. For a month, both countries have been readying to pump as much oil as possible — even as the coronavirus pandemic slashes consumption worldwide — in a bid that has cratered the price per barrel.

American shale oil producers have felt much of the pain, and this week the Energy Information Administration predicted that by summer the United States would once again become a net importer of oil, as domestic production contracts and overseas markets shrivel.

President Trump predicted Friday that a deal was at hand, but days have gone by with neither side committing to it.

The United States, Russia and Saudi Arabia are the Big 3 oil-producing nations, and the other two want to see American cuts in proportion to their own. But Washington cannot unilaterally order such reductions, and Trump said he wouldn’t do it anyway, though there is a proposal that Texas act at the state level. He has hinted that he might impose tariffs on imported oil, over opposition from the major American companies.

The tumbling market, in any case, is likely to force U.S. companies to scale back. It was unclear Wednesday if the Russians and Saudis would be willing to accept that on their way to a truce.

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There is no precedent for what is happening in the oil business, but the best analogy might be the collapse of prices in 1931, at the height of the Great Depression.

“The ’30s, in a way that never would have been expected, really resound today,” said Daniel Yergin, author of “The Prize,” a history of the oil industry. Then, as today, there was “economic paralysis and a sudden flood of oil.”

Ninety years ago, the flood came out of the newly discovered Black Giant field in East Texas. By May, the price in Texas had fallen from about $1 a barrel to 15 cents. The Texas Railroad Commission tried to impose quotas, but it was repeatedly stopped by the courts. Finally, the governor sent National Guard troops to East Texas to enforce what was called “pro-rationing.”

The price recovered. But there was one big difference between then and now: American oil consumption appears to have fallen about 14 percent between 1929 and 1932, the worst years of the Depression (based on production figures). That’s significant, and it was painful. But today consumption is on the way to a drop of 20 to 25 percent, over a period not of three years but of weeks.

Back then, “we had nothing like this sudden and massive demand contraction that we see now,” said Robert McNally, head of the petroleum analytic firm Rapidan Energy.

The bright side, said Yergin, is that the current consumption downturn is unlikely to last as long as it did in the Depression. And production is certain to decline rapidly.

“The harsh reality indicates that there will be some kind of deal or understanding to reduce the flood of oil,” he said.

That’s what the Saudis say they hope to get out of Thursday’s conference of what are called the OPEC Plus nations, to be followed Friday by talks among energy officials of the Group of 20 nations, also sponsored by Riyadh.

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Some analysts are pessimistic a deal can be reached this week, but many agree one will have to emerge sooner rather than later, because available storage capacity for excess oil is rapidly filling up.

Michael Hsueh, a strategist with Deutsche Bank, said in a note that any agreement that falls short of a 10 million barrel-a-day cut could not be considered a success, but given how many countries are involved in two days of meetings, and the short time frame to hammer out a complicated agreement, “there are more than the usual number of pitfalls here.”

And even if production cuts do come out of the talks, it is unlikely they will compensate for the continuing drop in demand.

Rystad Energy, a Norwegian analytical firm, said Wednesday it expects a 27.5 percent drop in consumption in April, compared with a year ago, with some improvement predicted for May.

The Energy Information Administration forecast a decline in U.S. consumption of 500,000 barrels a day this year, compared with 2019.

But IHS Markit, the company Yergin is associated with, predicts a fall of 2.9 million barrels a day, or close to 15 percent of American consumption.

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The global price of oil is down about 60 percent since February, but an analyst with Rystad, Bjornar Tonhaugen, said in a note Wednesday that the market price still does not accurately reflect the gigantic stores of oil that have built up worldwide, and which will continue to exert pressure downward.

Oil producers plan to cut their spending, mostly on new wells, by 36 percent. This week Exxon, the last holdout, announced it was cutting such capital spending by 30 percent, or about $10 billion.

Most of those cuts will be felt in the United States and Canada, where shale and sand tar oil are more expensive to produce, than in the Middle East, offshore or in Russia. “Oil spending is falling around the world, but the most dramatic cuts are in North America,” Dan Pratt, of a subsidiary called IHS Herold, said in a note.

Some oil producers have asked the Texas Railroad Commission to reimpose quotas, for the first time since 1972. Others oppose the move. The commission meets April 14. No one, at this point, expects the governor to have to send troops into the oil fields, in a replay of the 1930s. But as Yergin pointed out, no one expected this kind of “demand shock,” either, until it happened.

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