2020 OIL CRASH
cover enormous overhead. This critical factor should be a real incentive for Russia and OPEC to commit to oil price stability.
The fourth plan of action is for the US to join OPEC Plus as an observer and collaborate with them to regulate and stabilize oil markets. One may wonder if this plan will work, especially since rifts between Russia and Saudi Arabia in March this year revealed dysfunctionality in OPEC Plus. We should however remember that such rifts have always existed even among OPEC members. The key point is that OPEC Plus offers a platform for dialogue and discussions among oil influencers. Common interests, sooner or later, overcome conflicts.
There is a history of government interventions in regulat- ing oil markets in the US too (Yergin, 2008). OPEC, in fact, was modeled on the Texas Railroad Commission (TRC) which, during the 1930s-60s regulated oil prices by setting produc- tion allocations in order to maintain the wellbeing of the US domestic oil industry. Venezuelan oil minister Pérez Alfonzo (1903-1979), who lived in exile in the US in the 1950s, con- ceived the idea of OPEC after he was inspired by the success of the Texas Railroad Commission. From 1959 until 1971, the US adopted the Mandatory Oil Import program, according to which imported foreign oil could not exceed 12 percent of its domestic production – a policy to protect American oil produc- ers. After the 1973 oil shock, when US domestic oil production sharply declined, the government banned the export of domes- tic crude oil (Yergin, 2008). This forty-year ban was lifted only in 2015, and since then the US has become an exporter of oil and hydrocarbon gas liquids – thanks to the shale revolution. The US petroleum industry is indeed in a strong position.
What OPEC and Russia fear is not so much the increase
of US oil production to meet its own domestic needs. They know that US shale and technology will not vanish, and that their oil exports to the US are far less than those of Canada
and Mexico (these two latter countries account for 55 percent of the US crude imports). OPEC is mostly concerned about how much oil a country can export. What OPEC and Russia fear most is that the US becomes their strong competitor in world oil markets. The major part of OPEC’s and Russia’s oil and gas goes to Asia and Europe – huge markets that these countries do not want to lose to American oil producers. This is probably the most important point of contention between the US and OPEC Plus.
April 2020 Crash
In April this year, three significant events happened in the oil market, and it is important to watch how they unfold.
First, on April 10, OPEC Plus announced that it would cut its production by 9.7 million barrels a day for the months of May and June (and then 8 million barrels a day for the rest of 2020; US News and World Report, 10 April 2020). This mag- nitude of oil production cut by OPEC was unprecedented in its history, and the decision by OPEC Plus was made because of the self-interesed need to raise oil prices as well as political pressure by the US President. Nevertheless, oil prices did not rise mainly because of glut in oil supply and the continued low demand for oil.
The second event happened on April 14 in Austin where the TRC met with representatives from oil companies and trade groups to discuss of the idea of apportioning or limiting oil production. The TRC has not done this for nearly half a century. On May 5, the TRC voted 2-1 against production cuts but voted unanimously in favor of waiving fees for new crude oil storage projects.
The third event happened in New York’s stock market. On April 20, just a day before the oil trades for the month of May ended, futures prices for WTI for May dropped to minus $37 a
Figure 3. Oil prices for West Texas Intermediate (New York stock market) from December 2, 2019 to 2020. (source: Markets Business Insider online)
58 TPG •
Jul.Aug.Sep 2020
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