2 Reasons Why the Resignation of the Railroad Commissioner Should Worry You

As the Midland Reporter-Telegram (and other news sources, obviously) noted late last week, David Porter, the Republican leader of the Texas Railroad Commission, advised that he will not seek reelection to that post. Most people (not to mention media outlets) met this decision with a response somewhere between, “Who? What?” and “Meh.”

However, if you know or care anything at all about the current oil crash, this is huge news. As the title of this article suggests, there are at least two reasons why this was an important development.

First, though, in an naked attempt at building anticipation, let me digress by explaining what the Texas Railroad Commission does. First, as the name would imply, the Texas Railroad Commission accomplishes, quite literally, almost nothing to regulate the Texas railroad industry. Instead, it is the industry “regulator” for oil and gas exploration in the state. I put regulator in quotes, because to call the commission’s recent efforts regulation laissez-faire would be to say that Stalin was “sort of” a jerk.

Believe it or not, the RRC (as it’s known by the lazy… like me), was founded in an earlier era as a progressive institution to protect Texas citizens from evil, land-grabbing railroad barons. It’s shocking, I know, but Texas once was a liberal stronghold. Later, however, the RRC was tapped when the race for market share caused the implosion of the oil industry around the time of the Great Depression.

Commissioners were tasked with curbing unregulated production. The RRC instituted a practice known as “prorationing”, by which the commission would determine which wells in which fields were allowed to produce a given amount of oil in a month. It would then monitor and enforce those prorations by metering oil at the source of supply and in the midstream network. It was wonderfully successful, much to the initial chagrin of opponents. Slowly but surely, the production of oil started to fall towards an equilibrium based on demand, and the price (and the Texas economy) began to recover.

Which leads us to today… Why on earth should we care that Mr. Porter will not run again?

Glad you asked!

1. Signaling theory suggests that this is bad news for oil prices.

There are only two reasons (that matter, anyway) why a politician refuses to run for an office again. Either 1) their performance or personal lives have proved ruinous in the position in which they have found themselves; or 2) they see a bad tidings and have decided that retreat is the best strategy. Nobody wants to be Captain of the ship when it sinks… things never turn out well. There is no indication I have seen that Mr. Porter has been anything less than an excellent steward of the State’s preferred method of not regulating anything or anyone at anytime. Additionally, I would not suggest, nor have I heard, any story regarding problems in Mr. Porter’s private life that would suggest he announces his decision based on personal pressures. For these reasons, option 1 seems much less likely that option 2.

So, if it is to be option 2, let us discuss… Option 2 would indicate that Mr. Porter has witnessed the gathering storm and realized he left is umbrella at home. What this further signals, then, is that the oil market is not in for wine and roses in the near future (as many in the industry argue). Instead, in our scenario, Mr. Porter does not want to be in driver’s chair at the expiration of the next chair’s term because he knows that the downturn in the industry will, through no fault of the chair’s own, stick to that person. This theory further suggests that Mr. Porter – the person who helms the largest oil and gas regulatory body outside of the federal government – believes that the “lower for longer” mantra is actually true… and doesn’t want to be involved with the oil and gas industry when the rest of us figure it out.

If this is true, then that is a significant piece of information that has escaped media scrutiny.

2. This could be bad news for oil companies.

For the second theory, we need to hark back to history. Let us not forget that the modern RRC was founded on the strategy of price controls in the marketplace. History, as you may know, has a tendency to repeat itself.

Currently, as I have argued here before, a host of zombies munching away at the ankles of the oil industry grips markets with fear. With every barrel these companies pump, they eat into volumes that could be supplied more efficiently by other producers… or not served at all in an effort to raise the prices of the commodity.

It is possible, just possible, that Mr. Porter began to hear whispers from healthier oil companies that they would be better off if someone would just regulate the production in the state to protect their margins. That someone, of course, would be the RRC chair. Hopefully, it is not difficult to see in today’s current political environment why a staunch right-wing Republican (he’s Texan… He’s Republican… I’m making a guess) would hear those whispers and run screaming into the Hill Country.

Regulating oil production in the State, while advantageous for healthier companies (and perhaps even for worldwide prices!), would be political suicide for a Texas Republican. He could be challenged in every subsequent election from the right because he is a Big Government RINO (Republican In Name Only) and from the left because he failed to regulate fast enough and contributed to the decline. In this scenario, the smart money is to decide not to run until the economic environment begins to stabilize in the world oil markets; then to return as the “savior” for Texas firms through the glory of deregulation.

Pick your poison, no matter which which option you believe, ill feelings in the oil patch are not going to be as short-lived as we would like. David Porter just told you so.

This entry was posted in Uncategorized. Bookmark the permalink.

2 Responses to 2 Reasons Why the Resignation of the Railroad Commissioner Should Worry You

  1. When can we get Jeff Lambert to run for RRC Commussioner?

    It’s hard to imagine that the oil prices are in the $30s when just s few years ago they were in the $100s. I’ll agree that the Commissioners face a much different challenge than they did before the downturn. I’m not sure I agree that Mr Porter’s decline to run is necessarily a sign that the price won’t bounce back. I’m more in the US-Saudi Arabia keeping prices low to defeat Russia conspiracy camp.


    • Jeff_Lambert says:

      Thanks for the reply… Jack? Can I call you Jack?

      I certainly did not mean to suggest that Mr. Porter’s absence would pressure prices on its own! Rather, I meant to say that Mr. Porter, as a politician, has read the tea leaves and did not like what he saw… Since he is an expert in the industry (one would hope!), that is a bad sign for those of us with a keen interest in how the price of the commodity is doing.

      Thanks for the reply, Jackal! (Full disclosure, we know each other.)


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s