MS ORTAGUS: Hey, thank you so much. Good afternoon, everybody. Hope everyone’s healthy, doing well. Welcome to our Wednesday daily briefing. Thank you – thanks for joining us. With me today I have my friend, Assistant Secretary Frank Fannon, who many of you have already met. He leads our Bureau of Energy Resources. Just a reminder that today’s call is on the record but it is embargoed until the end of the call.
Today we’ll be discussing the announcement over Easter weekend that the world’s largest oil producers have agreed to an unprecedented cut in output. This decision represents a major victory for the United States, President Trump, and our energy diplomacy, and it’s the product of a whole-of-government approach by the United States to support the global oil market. Assistant Secretary Fannon will begin with some opening remarks per usual and then we will take a few questions. Just a reminder to press 1 and then 0 if you would like to ask a question, and again, this call is on the record but it is embargoed until the end of the call.
Go ahead, Frank.
ASSISTANT SECRETARY FANNON: Thanks, Morgan. Thank you, everyone, for joining me on the call today. I’m delighted to be here. I’m especially pleased to share this diplomatic victory with all of you, a victory led really from the very top, from President Trump himself. Thanks to the President’s leadership, the United States was able to reach this historic energy agreement this past weekend.
We went through a rocky period of uncertainty in global oil markets over the past few weeks, but this latest deal, agreement provides an ability to restore a sense of calm, and it’s critical that we did so. Coronavirus’ effect on the global economy is severe and we still don’t know for how long. Therefore, it’s critical that the nations – that all nations take the measures to reduce market volatility, given this uncertainty, as much as possible.
This supply glut, this oil supply glut was something that was within our control, and that oversupply has affected United States companies, as is well reported, but it’s also affected other nations that disproportionately depend on oil revenues to power their economies and for their citizens. International Energy Agency has spoken to this issue and noted that some of these are fragile or near-fragile states. As such, it was critically important that the G20 nations and like-minded countries, as well as producing countries, take necessary actions.
Secretary of State Pompeo certainly recognized this situation. On March 24th he spoke with the crown prince of Saudi Arabia and it was – we have a public readout of that that was issued the following day on the 25th. But in that call the Secretary and the crown prince focused on the need to maintain stability in global energy markets amid this worldwide response to COVID-19. The Secretary stressed that as a leader of the G20 and an important global energy leader, the Kingdom of Saudi Arabia has a real opportunity to rise to the occasion and reassure global energy and financial markets when the world faces such significant economic uncertainty.
In coordination across the interagency and certainly, as I mentioned, led by the President himself and the White House, the State Department was engaged throughout the course of this last several weeks, and we’re very pleased that the kingdom went forward and called a G20 extraordinary energy ministers meeting to come to a consensus to help stabilize the energy sector. The ministers reached important cooperative agreements that allowed our work to remain – the United States work in particular – to remain market-focused and to complement the work being done by the various energy ministers from major producing states. They all acknowledged the importance of international cooperation in ensuring the resilience of energy systems and recognized that energy security is a key enabler for economic activity and a cornerstone of global market stability.
Again, the outcome of this – the last several weeks led by the President really is a huge victory for diplomacy. Our energy strength in the United States has certainly increased our ability to weigh in and affect the global energy international mechanisms to support the reduction of volatility, but also to increase our partnership, our energy partnerships with like-minded countries around the world.
I just want to underscore this important point from the deal, as it were: The U.S. has been clear that it remains a free market economy and that the U.S. production cuts – and there’s a considerable amount of media coverage on what that will look like – is a direct response to markets, not the government dictating private sector behavior.
My last in closing – again, underscore that this is a broader victory for energy resilience and confidence which really is based on the United States’s enduring innovation and ability to tap into that entrepreneurial spirit as well as our resources effectively.
And with that, I’d be happy to take some questions. Thank you.
MS ORTAGUS: Great, thanks so much. And again, it’s just 1 and 0, guys. I think you know the drill by now, but just in case.
Okay, first up in the queue we have Humeyra from Reuters.
QUESTION: Hello, Frank. Thanks, Morgan. I just wanted to ask you about how you see the oil markets going forward because the demand – the cuts in the demand is far higher than the production cuts. We’ve got 30 million barrels off and you’ve got 15 million or some sort production cuts and some of them are voluntary. And say like Fitch today, for example, says some of it may not materialize, the voluntary bit, so they expect an oversupplied market. How do you see that impacting the U.S. companies as well going forward, and can I just get your thoughts on that? Thank you.
ASSISTANT SECRETARY FANNON: Yeah, sure. Well, I guess as a general matter it’s too early to tell because if it’s – we’re trying to base – I suspect the modelers that you’re referencing are trying to model something that they have zero understanding of what’s going to happen in terms of the demand picture and the global economic recovery in the United States and elsewhere, which is why I think it was so important that the President, Secretary of State, the interagency called on this collective action, which is a measure that we can control, which is the oversupply situation.
The U.S. – I can’t speak to how some of these models eventuate, the conclusions they come to, but when you see U.S. companies cutting, idling rigs, laying down rigs, cutting CAPEX 30 percent, billions and billions of dollars of money that’s not being invested, that there’s I think a pretty clear correlation in terms of particularly short-cycle production. So I’m pretty confident from all the numbers that we were seeing, and I think just today the IEA issued its report where it’s projecting the U.S., Canada, Brazil, Norway – they have a number here – it’s going to decline 3.6 million barrels. The timing is going to be a bit variable because of the cycles of the business cycle, but I have the greatest degree of confidence in the U.S. business and the private sector to do what they need to do in response to market conditions. I mean, the entire shale revolution as it were was based out of the private sector and responding to the market. I have every confidence that the private sector will respond in the opposite direction. Thanks.
MS ORTAGUS: Great, thank you. Let’s go over to Matt Lee.
QUESTION: Hey, Morgan, thanks. And Frank, thank you. A couple things very briefly. One is when exactly do you expect to see this quote/unquote “historic deal” actually have an impact other than the price of oil continuing to decline. Again today it’s down – it’s down again. And then secondly, you’re very quick to congratulate the President and the Secretary, but in fact is it not the case that a group of lawmakers – Republican lawmakers – really were the ones who (inaudible) this to make– force the administration to take note by directly intervening with the Saudis and really, like, taking it to them? Thanks.
ASSISTANT SECRETARY FANNON: Well, I guess I was just speaking to – I can’t speak to the time horizon. I mean, Congress has a role. They’re an independent branch of government and certainly have been vocal about their — across the various policy prescriptions as well. And they have a role to play, and they certainly have played that. And I know that they continue to monitor and want to see action, so this will be an evolving situation based on the — when we all get back to work, when we can do this in person again.
But I think that the – there’s going to be a latency in terms of the supply buildup and how that works its way out. And so the market reactions on every one day, I can’t speak to that. But what we’re talking about is huge stores of a physical commodity that has amassed over time, and there’s going to be a latency effect because of the price situation sending a signal to the private sector to curb, and you’ve already seen the announcements on pulling CAPEX. There’s going to be a latency effect, so I think the system just has to work its way through as a natural evolution of that. The various – some of the other producing states will continue, and I – in terms of their future curtailments. They’ve already announced that, 23 percent reductions beginning immediately, and so I think that it’s all going to kind of work its way, but right now I think we just have this oversupply. We’ve got to get through this and then we’ll proceed.
MS ORTAGUS: Okay, Frank, did we lose you there? Are you still on?
ASSISTANT SECRETARY FANNON: I’m still here, thanks.
MS ORTAGUS: Oh, okay, good. Sorry, it sounded like it cut off for a second. Okay, Emily Meredith from Energy Intelligence.
QUESTION: Hi, Frank. Thanks for taking the time to do this. So, I wanted to ask you to put this in a bit of historical perspective. Obviously, to see President Trump helping to facilitate discussions among OPEC members is really a shift from an historical perspective. Is – do you think that this is the U.S. at a turning point where its interests are essentially the same as those of OPEC members and their allies because of the size of U.S. output, or was this more of a function of this specific moment in time?
ASSISTANT SECRETARY FANNON: Yeah, I guess – excuse me – and a lot of you and perhaps others have written about kind of the evolution of the U.S. approach to OPEC, and certainly the President in particular. What I think is this is a stark recognition that there can be some flexibility and some – an evolution of thinking because – to serve the country, and I think that’s a key component of real leadership.
The scale of the oil patch, as it were, as in the breadth of it and the direct or indirect jobs and the broader economic impact it has for the United States, is significant and I don’t think we fully appreciate its importance overall. Historically, politicians of every stripe laud low gas prices and they historically say, oh, it’s like a tax cut. But if no one’s driving, if no one has anywhere to go, it’s effectively a tax cut that has no benefit.
And so it seems like to me it’s certainly injurious to the United States, but I think it’s more – like as I mentioned before, there are a lot of countries that are dependent on oil revenues, disproportionately so, and if they lack a means to provide for themselves, then it creates a whole host of additional potential foreign policy challenges, especially if they’re near-fragile states.
So there’s a lot of I think foreign policy reasons why this deal and the forward path is so important (inaudible) why we all have to continue to monitor it and continue to maintain close collaboration across the countries, because there’s a lot at stake here. Thanks.
MS ORTAGUS: Okay, great. Let’s see, we have Stephen Cunningham from Bloomberg.
QUESTION: Given, Frank, that oil is trading below it was before the deal was announced, is there any sense that the deal didn’t go far enough or perhaps more cuts will be needed in the future? And also has the threat of tariffs and other retaliatory action been completely taken off the table?
ASSISTANT SECRETARY FANNON: Yeah, thanks. I’ve – I think I’ve spoken to the point about the time horizon. Again, these are big – these are big-scale types of endeavors. We already have supply buildups and that has to work its way through the market. I can’t speak to the daily variances of trading. That’s a different thing.
In terms of the tariffs, I think it continues to be something that’s on the table. It’s certainly something the President had weighed but he consistently said it was a lever he didn’t think he would need to pull.
So I think that where we are right now in this collaboration – it’s a really critically important time, it’s an unprecedented type of an agreement, and it’s encouraging that it was able to come together as it did. Certainly the President’s involvement was critical to that success, but it’s still something to monitor and watch, and I think we will all be monitoring it closely, constantly engaging with our partners around the world to ensure that we reduce the volatility that is in the market, we create a sense of calm and a degree of resilience as we all get through this corona-induced demand destruction.
MS ORTAGUS: Great, thanks. Okay, next we have Josh Siegel from the Washington Examiner.
QUESTION: Yes, thanks for doing the call. I appreciate it.
So my question is: I’m wondering – you spoke to the U.S. free market system earlier. As I’m sure you know, Texas had a hearing yesterday to consider prorationing and potentially forcing producers there to hold back production. Oklahoma is looking at the same in a few weeks. And yeah, one of the companies that has called for that in the shale – in the Texas shale area said that they are hearing that the Saudis did want something more official from the U.S.
I mean, in general, like, I know – I mean, obviously you’re in the federal government, but do you – I mean, what do you think of states considering these kind of ideas? Do you think that type of escalation is necessary considering the deal that just went through?
ASSISTANT SECRETARY FANNON: Yeah, thanks for the question. I kind of – when this talk was started, I was reflecting on some of Larry Kudlow’s statements on this, and I think he provides a really good direction and reminding of how the United States remains a free market economy.
But we also respect – tend to respect states’ rights, and if states – if that’s the direction some states want to go, that’s – in my view, that’s certainly outside the purview of the State Department, and that’s – if the states, whether they’re Texas or Oklahoma or others, that’s for them to kind of figure out. But at the federal level, you’ve heard time and time again the recognition that we are strong supporters of markets and market reactions. That has the best – the private sector and the market reactions are the best way forward.
MS ORTAGUS: Great, thank you. Tracy Wilkinson.
QUESTION: Thanks. I wondered if you see in this any implications for the U.S-China trade deal. Would China still be willing to buy U.S. oil or not? Would the U.S. maybe end up exporting rather than import – I mean importing rather than exporting? Do you have any thoughts about that? Thanks.
ASSISTANT SECRETARY FANNON: Yeah. I’m sorry, Tracy. I’m going to have to kind of defer on this one and refer you to some other agencies that are most closely following that. I mean, my initial thinking is if the country signed up to make certain purchases, I would think that there would be an expectation that they fulfill their commitments and those obligations. But beyond that, I’d have to defer you to other – the more trade-focused partners in the interagency. Thanks.
MS ORTAGUS: Thanks. Ryo Nakamura from Nikkei.
QUESTION: Thank you for this call. I want to ask you about your view on the demand recovery. We are now used to working from home and doing telephone conference instead of taking a drive to the office or taking a long flight to attend an international conference. Do you think those changes of our behavior would affect the demand recovery for oil? Do you think the recovery could be slower than a normal economic depression?
ASSISTANT SECRETARY FANNON: Yeah, so what you’re – I guess you’re asking do we think there’ll be a behavioral change coming through this. And I don’t have a good – I don’t have a really good sense of that, I’m sorry to share. I mean, I can just speak kind of personally, and there’s so much work that we do that really requires face-to-face meetings. I mean, if you speak to going to a conference, the actual conference agenda is just a part of that. It’s also some of the other discussions that take place.
So, I – from where I sit, I think that there will be a robust return, maybe not quite to the way things used to be because we have to – as we follow the guidance of health experts on managing exposure. But to the extent that we can, I would think that we’d be eager to get back more to the way things had been.
I know. I have three kids and they certainly want to get back to school, which I will remind them of when they complain when they go to school in some months. Thanks.
MS ORTAGUS: Thanks. Okay. Tim Tuko, Wall Street Journal. Tim, do we have you?
QUESTION: (No response.)
MS ORTAGUS: Okay. Let’s go over to Lara Jakes, then.
QUESTION: What the [expletive].
OPERATOR: Tim is open. Your line is open.
QUESTION: Right, okay. Can you hear me now?
MS ORTAGUS: (Laughter.) Yes, we can hear you.
QUESTION: All right, guys. Thanks.
ASSISTANT SECRETARY FANNON: That’s the good part, so —
QUESTION: Frank, I appreciate you doing this. I want to clarify something that you said before, because it sounded like you were saying that the private sector is going to be responsible for a glut from here. You expect private sector decisions to guide how that – that glut gets drained away.
But I want to be very clear that the deal is for 10 million barrels, demand is down somewhere between 25 and 30, there’s a real sign that all this is going to play out the same way in these oil companies, and all the OPEC-plus nations are going to look to Trump and the Trump administration to do the same thing. I don’t see how that’s avoidable.
Are you guys going to tell them the private sector will deal with this, or what is your plan when these requests come to you all again for intervention?
ASSISTANT SECRETARY FANNON: Well, the – our system works differently. I mean, do you have – I have greater faith – I have the greatest faith that if a company announces billions of dollars in investment curtailment, that that will realize a less volume of production. And the others have assessed – there’s assessments, I think at the G20, we’re talking two-plus million barrels that will not be produced in the U.S. because of this – two to three. And so I have every expectation that that will make its way.
Now, other countries may find our free market system – they might find that disconcerting, but that’s not new. The – our – we don’t control our energy production and our companies the way they do, and that’s not going to change. The – just in a similar way that a low price is – creates a behavioral change, forces a degree of rationalization in the market and the efficiencies, so do higher prices. High prices led to the creation of the deep broader offshore industry. Higher prices led to the creation of the shale industry.
So that’s the way in which we approach it, and we – I have every confidence that the United States will respond to the market in a rational way. We’re already seeing that and hopefully we’ll be able to do it without the – fewer and fewer of those kinds of announced bankruptcies and that, and companies can manage the way they do, but this will force a degree without question of efficiency in the producer, and the U.S. producers will be stronger and more resilient for it.
MS ORTAGUS: Thanks. Let’s take one more from Lara Jakes. Lara, you still on? Okay, let me just do a check. I think if we have – oh, we (inaudible).
OPERATOR: Just a second, she’s still on. Lara is still on. Just one second. There you go.
MS ORTAGUS: Hi.
QUESTION: Okay. Thanks. So I know the State Department thought that one impact of the feud between Russia and Saudi Arabia had a kind of a silver lining for the pressure campaign against Nicolas Maduro in Venezuela, and that it increased more pressure on him as the prices were low. And so now that there’s a deal, I’m wondering what effect you think that’s going to have on the framework that was announced last month.
ASSISTANT SECRETARY FANNON: Yeah, thanks for the question. I – yeah, I think the low oil price has affected every producer around the world, and Venezuela’s not exempted from that market reality. With respect to Russia, United States initiated sanctions to prevent Russian entities from the illicit trading of oil that helped the former Maduro regime continue to perpetrate its abuses, which by the way has created the – a greater refugee crisis than in Syria. The scale of what is occurring there because of the illegal Maduro regime continues. And so we have increased our pressure campaign on the regime, which included the sanctioning of entities – Russian entities – that facilitated his hold to power through the trading of oil. That’s not stopping; we’re continuing that.
I think with respect to the announcement toward a democratic transition, the – that’s the consistent position we’ve had. We’ve – and we welcome that to happen as fast as possible. We continue to maintain our position with respect to anyone who trades illicit oil to fuel this human rights crisis behind Maduro, and we encourage all countries to come onside and not participate in that behavior. We’re hopeful that Russia will be a responsible actor in that regard as well, and we’re continuing on our pressure campaign. Thanks.
MS ORTAGUS: Great, thanks so much everybody for dialing into this call. We appreciate it and we will speak to you later. Thanks.
ASSISTANT SECRETARY FANNON: Bye-bye.