The Oil Price War

The Oil Price War

One consequence of the emerging global Covid-19 recession has been that it has helped push world oil prices down from the $60.77 per barrel range near the beginning of 2020 to $23.12 for West Texas Crude and $29.00 for Brent Crude, levels not seen since the end of 2008. But part of why that decline has been so sharp and deep has been thet Saudi Arabia has increased production while Russia has kept up production, despite the Saudis demanding that they cut production.  So there is an oil price war going on.

Of course this will tend to cushion the recession for oil consumers.  But the US has become a small net oil exporter, and reports have it that a subsidiary reason for the Saudis and Russians getting into this price war has been to tank the US fracking industry in oil and natural gas, which by most reports cannot survive if prices remain as low as they are now.  So while US oil products buyers may be better off, the recession in oil producing parts of the US will be made worse.  It  should be kept in mind that a non-trivial part of the US economic growh in 2017 was a major increase in fracking activity, with half the increase in capital investment coming from that sector alone.  The damage to oil production in the US will probably exceed the benefits from lower prices at the pump in the US.

A curious corollary to this is that the leaders of both Russia and Saudi Arabia have made serious moves to enhance and expand their own power.  In Russia, Putin has moved to change the constitution so that instead of having to step down as president, he can run again twice more, keeping him still in as late as 2036, by which time he will be 84.  This still needs to pass a referendum, but few doubt that it will fail to do so, despite reported declines in Putin’s popularity.

In Saudi Arabia, Crown Prince Mohammed bin Salman (MbS) has had several rivals arrested on charges of treason, which can bring the death penalty.  One arrested is the former crown prince, Mohammed bin Nayef, whom MbS forcibly removed in a coup supported by Trump.  Another is an uncle of his, Ahmed bin Abdulaziz, one of the few remaining brothers of MbS’s father, with the line of succession having previously gone through them.  The charges are clearly trumped up, with Mohammed bin Nayef having been under house arrest since he was removed from power, and Ahmed bin Abdulaaziz having been very careful to avoid any public criticism of MbS.  But not good enough, they both need to be decapitated.

On Thursday Trump made an effort to prop prices up  by announcing that the US would purchae 30 mbpd, and the pricce did rise about 25% that day, only fall back again the next day, with West Texas reportedly going below $20 at ibe point.  There is some ability to do this, although with limits as there is only about a 150 million barrels excess capacity in the US Strategic Petroleum Reserve, about one and a half days worth of global production, with about a fifth of that already gone.  There are definite limits to how much Trump can do on this.

But what this shows is Trump’s priorities.  When the price decline first started Trump bragged that it would help US consumers, but now that the US oil companies have complained to him, he has shown where his interests lie, and this in the face of the need for massive spending to help defeat the Covid-19 pandemic.  Trump’s priorities here are seriously messed up.

Addendum: I have just read that it is not just the Saudis, but that UAE, Kuwait, and Russia are all ramping up oil production.  This is not out of trying to crash the US fracking sector or anybody else in particular, but simply to maintain revenues in the face of declining prices, which is, of course, a destabilizing positive feedback effect in the short run: more production will drive prices down further, with people talking abou $10 per barrel and even lower possibly.  Costs are so low in the Persian Gulf that even at such prices they can operate in the black. But many of them, especially Saudi Arabia, have gotten overly puffed budgets based on much higher oil prices, and KSA in particular is on the verge of becoming a net debtor nation. A third of their budget is military/security. Expect some serious cutbacks in that, which is welcome.

Barkley Rosser