2020 OIL CRASH
Figure 2 - Oil prices for Brent (London) from December 2, 2019 to May 14, 2020 (source: Markets Business Insider online)
Early in 2020, however, Russia refused to decrease its production in order to weaken US shale oil producers (Fig.2). Saudi Arabia then joined this feud by offering purchase dis- counts and also plans to increase oil production in order to keep its share of oil sale. In other words, these countries wanted to maintain their oil revenues by selling more oil at cheaper prices. The prospect of the oil market being flooded by Russia and Saudi Arabia at a time of reduced demand in the wake of the pandemic brought down oil prices, hurting US shale pro- ducers, international oil companies, and numerous producing countries whose populations are dependent on oil revenues.
USA Faces OPEC and Russia
What can the USA do in the face of OPEC Plus? Four options are briefly discussed here.
The first and probably the simplest one is to “do nothing” and let market forces fix it. In the words of an oil analyst, “With oil there is a price that kills supply and a price that kills demand” (McLean, 2018). In this view, low oil prices will force oil producers (both American companies and foreign oil countries) to reduce their production and fix the prices. However, oil producers have different price tolerance levels. Therefore, this policy will leave the market porous to volatility, and especially the American oil producers will be subjected to instability due to price wars of OPEC Plus.
The second plan of action would be to decouple US oil from foreign oil markets. This would mean that the US (through a presidential executive order) sets a domestic oil price (let’s say $60 a barrel) and then puts tariffs on any imported oil cheaper than the set price. If world oil prices are lower than the US domestic prices, this policy will generate an enormous amount of revenue for the US government because the US is the world’s largest oil consumer (about 20% of world oil)
and imports several million barrels of crude oil daily. US oil companies also would benefit from this plan because they would be protected against cheaper oil from foreign countries. However, American consumers will pay higher prices not only for gasoline but also for many other products downstream of oil, and American oil companies will have little incentive to sell their oil overseas. This policy will have strong supporters among the US shale producers and independent companies.
The third option is the Business as Usual, that is to persuade OPEC Plus to decrease their production. In March this year, the White House indeed called on the Saudis (and Russians) to lower their oil production. This is, however, neither a fun- damental solution nor a new policy. Since the end of World War II, all US presidents have cultivated close relations with the House of Saud in order to use their influence over oil supplies and prices (Bronson, 2006; Vitalis, 2009). But times have changed. From the first oil shock in 1973 until 2010, the US heavily depended on foreign oil, including some from the Middle East. In the past decade, however, US oil production more than doubled – from 5.4 million barrels a day in 2010 to over 12.7 million a day in January 2020 (EIA, 2020). In 2019, the US surpassed both Russia and Saudi Arabia as the world’s topmost oil producer.
OPEC and Russia no longer regard the US merely as a cli- ent but as an emerging rival in the world oil market. It thus seems odd to expect OPEC Plus to cut back on their produc- tion so that US oil producers survive and thrive. Both Saudis and Russians know this; saving US oil companies is the least of their concerns. But what both Saudis and Russians also know is that these low oil prices are disruptive of their own economies as well. Even though oil production costs in OPEC and Russia are far less than those in the US, the governments and welfare systems of these countries heavily depend on oil revenues and high oil prices. Therefore, their sale price has to
www.aipg.org Jul.Aug.Sep 2020 • TPG 57
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