April 7, 2020

Oil Price War

“Oil prices sharply fell after the so-called OPEC+ group of countries including Russia failed to agree to production cuts in early March. A price war began soon after, with Saudi Arabia threatening to pump at a record-breaking pace to seize back market share even as the coronavirus pandemic saw demand sharply drop.” AP News

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From the Left

The left is critical of Russia and Saudi Arabia and calls for steps toward decarbonizing the economy.

Dated but relevant: “In geopolitical terms, Mr. Trump should be absorbing the lesson that Russia’s president is not a U.S. friend, actual or potential, but rather a despot willing to play hardball against this country’s vital interests. The Saudi crown prince, too, has shown himself to be an unreliable player on the international stage, putting the U.S. economy at risk when it suits him, despite the vast military assistance, and lavish rhetorical support, that the Trump administration has given his brutal regime. At a time when the whole world needs to pull together in the face of a global public health threat, these two men are destabilizing it for their own selfish ends.”
Editorial Board, Washington Post

“As of April 6, oil stands around $30 a barrel, and that’s disastrous from Russia’s point of view. The country heavily depends on oil revenues to fill the government’s coffers. Without a large, reliable amount of money coming in, Putin will have fewer funds to spend on his nation, let alone deal with a growing health crisis at home. For Putin to mess with the oil market as Covid-19 cases grew around the world, [a Russia expert] says, shows he sometimes lets short-term thinking drive his long-lasting, impactful decision-making. And now that the coronavirus crisis is growing in Russia, Putin will surely wish he could take that blunder back.”
Alex Ward, Vox

“In America, the immediate problems are the survival of energy companies and the job security of the nearly half a million people they employ. There is now an unbridgeable gap between the cost to drill for oil domestically and the price paid for oil on the market. Producers in Texas, which has experienced a fracking boom in recent years, need oil to trade around $50 per barrel to break even on a new well, according to a survey from the Dallas Fed. Oil prices in Texas dipped just below $20 per barrel in recent weeks. Oil companies are running out of places to store oil they produce, which means an even bigger drop if they run out [of] space…

“But for all the worry in the oil and gas industry, its leaders don’t agree on how to solve the problem. Many small producers, which face the biggest threat and could go bankrupt in the coming months, are desperate for any help, even if it means government intervention like tariffs. Big players with more cash are less inclined to push such steps, knowing they can wait it out. The American Petroleum Institute, the powerful industry lobbying group, wrote a letter to Trump last week opposing tariffs.”
Justin Worland, Time

“The most sustainable option, once the current crisis passes, would be an aggressive return to the strategy that tamed OPEC in the early ’80s — conservation — via gas taxes and other forms of carbon pricing. As both the biggest producer of crude oil and the biggest consumer, the United States has a conflicted national interest. The one thing we can’t allow is for the likes of MBS and Putin to exploit it.”
Charles Lane, Washington Post

“Climate advocates should welcome this as a golden opportunity to make common cause with an administration they firmly oppose. A strange twist of fate has aligned to make a ‘strange bedfellows’ coalition of red-state Republicans and environmentalist greens on oil tariffs… When the world economy returns to normal, the market will lift oil prices, regardless of what Saudi Arabia and Russia do. With the virus in the rear-view mirror, it will be time to focus once again on moving toward our long-term climate goal…  

“That means raising average gas mileage and ultimately transitioning the entire fleet to low-emissions technologies like electric vehicles. Putting a price on carbon emissions from transportation nationwide would help to do that. Oil tariffs would lay the foundation for this policy… The world needs to get to a new normal eventually — preferably sooner rather than later. A climate-friendly economy will have a different mix of jobs and companies than the unsustainable economy we have now. Oil tariffs will encourage consumers not to fall back into old patterns.”
David M. Hart, The Hill

“Big Oil is using the coronavirus pandemic to push through the Keystone XL pipeline… [They’re] flying in workers from across America to rural states with already strained health care systems, at a moment when all Americans have been asked to shelter in place, and pretending that they are ‘essential’ employees in order to build a pipeline that would carry oil no one wants or needs, and which would go a long way toward wrecking the planet’s climate system…

“It is difficult to escape the conclusion that the oil industry is acting decisively now because it knows this is the one moment when protesters can’t make themselves heard… Even in a moment when the rest of us are changing our every habit to try and protect each other, [oil companies] are willing to sacrifice nothing. No – let’s be clear again. In this moment they are using the cover of the pandemic to make yet more money, to do things they could not get away with at any other time.”
Bill McKibben, The Guardian

From the Right

The right is divided about whether the government should intervene to help domestic oil producers.

The right is divided about whether the government should intervene to help domestic oil producers.

Many note that “Thanks to fracking, the United States has become energy independent in recent years for the first time in decades. It no longer relies on oil imports from the Middle East and other global hot spots, and it has even become an exporter of both oil and natural gas. This has national security benefits, as the country no longer needs to be as concerned about maintaining the free flow of oil through the volatile Persian Gulf. It also has economic benefits as jobs in oil production are typically high paying and open to many people without college degrees…

“The president must continue to push for higher prices to secure U.S. oil production despite the fact this will increase gasoline prices. The dramatic rise in fracked oil production is a significant factor in spreading the wealth from economic growth to many of the blue-collar workers that Trump has long championed. In many parts of the country, such as in Pennsylvania, fracking undergirds the economy. Without Trump’s support, they could be devastated by an oil depression.”
Henry Olson, Washington Post

“Today, oil prices are not determined by market forces; they are manipulated by the OPEC+ cartel. Government interference is necessary and justified, therefore, to balance the damage wrought by the cartel. The tactic currently used by both Saudi Arabia and Russia is called ‘dumping’—the artificial lowering of prices by producers, often to the detriment of the seller itself, to gain a larger share of the market and drive out weaker competitors—so-called ‘injure pricing.’ This is not how free markets are supposed to function…

“For decades, the United States was actively involved in the Middle East, in part because the region has been a primary exporter of oil to the United States… Keeping the supply of oil safe and uninterrupted is the reason why there are so many American troops in Saudi Arabia and other Arab countries, as well as aircraft carrier groups in the Persian Gulf… Democratic presidential hopefuls, including Bernie Sanders and Joe Biden, and President Donald Trump, have long-since declared the need to disentangle the United States from the Middle East, and end America’s ‘forever wars.’ But geopolitical decoupling cannot be pursued without energy independence, which, in turn, cannot be attained when the U.S. shale industry is on the brink of destruction.”
Sukhayl Niyazov, Human Events

Others, however, argue that “Tariffs or quotas would do more harm than good… States during the Great Depression created an Interstate Oil Compact to limit production and raise prices. But some states including Illinois and Louisiana produced beyond their quota, which caused Texas to limit its production to support higher prices. Even the Organization of the Petroleum Exporting Countries has struggled to enforce quotas…

“As for anti-dumping duties on foreign oil, Saudi Arabia accounts for a mere 6% of U.S. crude imports. Most comes from Canada, and the U.S. doesn’t need to start another trade brawl with a top ally. In any case, U.S. refineries need to import heavier crude to mix with lighter, sweet shale oil. Tariffs would raise refiner costs without boosting shale oil prices… U.S. diplomacy is a better response to the double-barreled oil shock than are tariffs or quotas.”
Editorial Board, Wall Street Journal

Government meddling in the oil market, whether at the federal or the state level, inexorably will prop up less efficient producers — the ones most in trouble due to low prices — and make it more difficult for the more-efficient ones to take advantage of their greater efficiency in the face of adverse market conditions…

“Moreover, governments, whether at the federal or the state level, are not in the habit of handing out favors for free. The longstanding assertions of ‘subsidies for the oil industry’ — virtually none of those policies actually are ‘subsidies’ — will be far more difficult to refute once such real subsidies as cartelization and retaliation for ‘dumping’ are implemented. It will become vastly more problematic to argue against renewables subsidies and green new deals — and mindless regulatory costs imposed on oil and gas operations — and other such massive distortionary policies.”
Benjamin Zycher, National Review

“The question now is what, if anything, America should do to defend an important domestic industry from a hostile foreign power with a political agenda…

“This issue isn’t going away. Antifrackers will have to think more seriously about the place of energy in U.S. foreign policy. Concerns about climate change and the other environmental drawbacks associated with fracking have their place in that discussion, but so too does the geopolitical importance of the American energy boom. Do we want a world in which countries like Iran, Russia and Saudi Arabia rig markets in their favor and use their oil wealth to shape the course of world events? Do we want to be tied indefinitely to Middle Eastern oil suppliers whose values and interests are often opposed to ours?”
Walter Russell Mead, Wall Street Journal

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