Jerri-Lynn here. I have one major quibble with this post, which focuses on high-level maneuevring to get Saudi Arabia to call off its price war. But observers such as Justin Mikulka at DeSmogBlog have shown how the shale oil industry was in deep trouble long before the price war erupted.
We’ve crossposted much of Mikulka’s excellent work. See, e.g., Is the U.S. Fracking Boom Based on Fraud? and To Many’s Dismay, Permian Produces More Gas and Condensate Instead of Oil and Profits for just two recent examples.
By Julianne Geiger, a veteran editor, writer and researcher for Oilprice.com, and a member of the Creative Professionals Networking Group. Originally published at OilPrice
The U.S. is today showing signs of increased desperation as oil prices sink to levels that may pose a threat to the energy independence of the United States by kicking U.S. shale out of the market.
Several recent actions taken by the United States indicate that it may be attempting to change the current trajectory of the global oil market, including by showing interest in stepping up negotiations with Saudi Arabia, which is spearheading the ongoing market share war that is fostering ultra-low oil prices.
Drastic Times Call for Drastic Measures
The United States is facing a national emergency. The Covid-19 pandemic in the world’s largest oil consumer, The United States, has dented demand to the extent that a couple months ago, no one thought possible. The virus struck—first in the world’s largest oil importer, China–at a time when the oil markets were already concerned about a global oversupply.
The virus also struck around the same time that another critical oil-market event took place: the end of the OPEC+ production cut agreement and the start of the oil price war—with Saudi Arabia on one side and Russia on the other.
The result is that the U.S. shale industry, often touted as the backbone of the U.S. energy independence movement, has found itself caught in the middle between the oversupplied oil market and severely hampered oil demand.
And it looks like the government is getting worried.
On Monday evening, the U.S. made the decision to appoint Victoria Coates as special energy representative to Saudi Arabia. While the United States insists that this was in the works for quite some time, even before the oil war began, the timing coincides rather nicely with the shocking price drop for the US crude grade West Texas Intermediate, which is now trading around $23 per barrel, down from $60-something per barrel at the beginning of the year.
This $23 per barrel is not sustainable long term—perhaps not even short term—creating a sense of urgency in the United States to address the problem.
And who better to address than the perceived perpetrator of the oil price war, Saudi Arabia.
At the beginning of the oil price slide, the Trump Administration was singing the praises of the low oil prices. For consumers in the United States, lower oil prices mean an easing of cost of living expenses, freeing up money to spend on other things, and bolstering the economy in the process. This is all positive for consumers.
But it became clear rather quickly that oil prices were sinking far too low to be sustainable for the oil industry, and for the economy. Low gasoline prices mean very little when people aren’t leaving their homes to drive anywhere, as is the case now for nearly half of all Americans, so the single benefit of low oil prices will not be realized. These stay-at-home restrictions and lack of call for gasoline are contributing to the lack of demand and helping to push prices even lower.
The government has since shown signs of its panic—oil prices are too low, and something must give, and soon. That “something”, the U.S. hopes, will be Saudi Arabia.
Enter Victoria Coates.
When United States announced this week that it had appointed a new special energy envoy to Saudi Arabia, the Administration said it was “to ensure the Department of Energy has an added presence in the region.”
Coates was a critical component of the negotiations with Iran and Trump’s Middle East policy creation during her time at the White House, which ended in February when she moved to the Department of Energy.
The announcement comes about a week after President Trump, at a coronavirus briefing, said the U.S. would intervene in the oil war, stressing the U.S. had “a lot of power over the situation” and was “trying to find some kind of medium ground.”
Despite the timing, the U.S. is not owning the fact that Coates’ new assignment and the oil price war have any noteworthy link.
Lawmakers Out for Blood
But the move comes after intense pressure from U.S. lawmakers and others in the industry in recent weeks, some of who have urged President Trump to take the extreme stance of embargoing Russian and Saudi Arabian oil. Other calls to action include the Texas Railroad Commission’s suggestion to use pro-rationing that would force Texas producers to curb production—something that is unthinkable in America.
Mississippi Senator Roger Wicker and Oklahoma Senator Inhofe asked the Department of Commerce to slap a tariff on foreign oil, citing national security reasons.
Other ideas include outright conspiring—albeit in a somewhat unofficial capacity—with Saudi Arabia to coordinate production.
These rare developments and proposals all indicate one thing: the oil price war is hurting U.S. shale, and the government is worried. Energy security, energy dependence, and a significant portion of the economy are all riding on U.S. shale’s ability to outlast Saudi Arabia or Russia in the oil price war.
And while U.S. shale was the one to show remarkable fortitude the last time Saudi Arabia tried to squeeze it out of the market, the coronavirus component this time around, combined with what many see as an unhealthy debt load, have led to some question whether U.S. shale has what it takes this time around.
Embargoing or taxing imported oil for the sole purpose of driving oil prices up for consumers – hmmm…. I can see that going down well with Trump supporters as they fill up their SUV’s.
A key problem for the oil market, is that contrary to what Econ101 will tell you, lowered prices tends to lead to increased production. Because the marginal cost of increasing production from an established well tends to be very low, during periods of very low prices the incentive for oil producers is to maximise the amount of oil they produce so that they can improve cash flow. So trying to reduce production is going to be very hard.
As to whether the Saudi’s can be persuaded to stop – there seems to be an all out civil war going on in the House of Saud – whether that is an opportunity or not for the US to extract concessions, I don’t know – but its clear that to have any impact any cut in production would have to be very significant – certainly several million barrels per day – if it is to push the prices up to a level sustainable for US tight oil producers. The Saudi’s are desperate for cash so this would be very painful for them, even if they benefit from higher prices in the longer term. There is also the question of course as to what price they could extract from Trump for playing ball – US direct involvement in Yemen perhaps?
The Russians of course have no incentive to play ball. In many ways, its a major win for Russia if the US manages to cause even more damage to its own economy in the name of saving Exxon, not to mention the damage to SA, which will further increase Russias influence in the ME.
But if consumption is kept low during the quarantine, maximizing oil production from existing wells during low prices period doesn’t work unless some institution wants to buy it, for instance the Federal Government and importers wanting to replenish their stock deposits at low prices which, as I understand it must be already full. No SUV deposits to fill unless quarantines relax by much.
Yes, the problem is that the price ‘signal’ doesn’t work – they will keep pumping, until suddenly someone stops taking orders at any price. We haven’f reached that point yet, but we could well hit it soon. I suspect the first sign will be tankers moored offshore, just waiting for someone, anyone, to take their load.
Instead of tariffs on imported oil….. support the employees of the US shale industry and lay them off… and ENCOURAGE
importing oil from SA and Russia… Fill the strategic reserve… send thank you notes to MbS and Putin..
Never stand in the way when your competitors are making an error
That’s far too rational and strategic.
An oil well is not like a beer keg. Opening the spigot again after closing does not guarantee the same flow. Especially when you’ve had to mechanically and chemically manipulate the strata to get any flow in the first place.
On Monday evening, the U.S. made the decision to appoint Victoria Coates as special energy representative to Saudi Arabia.
Is this a calculated insult? A female envoy sent to one of the most patriarchal countries on the planet.
Isn’t this just yet another example of having been outmanoeuvred by Russia?
Saudi Arabia takes orders from the US, even though many of its royals are restless and like to play themselves on the global chess board and are quite capable of screwing up all by themselves as well. I don’t remember who exactly said this, but the setup is a bit like a mafia protection racket. The US provides “protection” and in exchange Saudi Arabia serves as the swing producer and acts as the safeguard for the type of oil policy the US favours, with reasonably stable oil prices. (as well as signing humongous defense contracts for weapons it’ll never use)
The expiring deal between Russia and the Saudis (actually Opec) was such that it maintained prices high enough to be a benefit to both, in theory, were it not for the fact that Russia started to lose market share to US shale players at that production and price level. Russia wasn’t willing to do that any longer. Saudi Arabia / US put Russia to the test, threatening this oil price war, forcing it to come back to the negotiation table. Russia seems to have calculated this move and decided to stay put. Some years back they proved they have a long breath and they’re better prepared now.
The U.S. now stressing that it has “a lot of power over the situation” and is “trying to find some kind of medium ground.” tells me they are ready to throw in the towel and that Russia played this well.
Re the insult: Possibly, but the Saudi’s got along fine with Albright apparently. They understood each other when counting victims in the hundreds of thousands and thinking it’s worth it.
Her Royal Highness Princess Reema bint Bandar bin Sultan bin Abdulaziz Al Saud was appointed Ambassador to the United States on February 23, 2019 by the Custodian of the Two Holy Mosques King Salman bin Abdulaziz.
Fracking shale for oil or gas is a Ponzi Scheme. The problem is with long term production. Basically most of the production happens in a short period of time. To keep up production new wells have to be constantly drilled. Eventually the locations available to drill are used up. When this happens production will also soon end.
So wait, are you trying to tell me that Mr. Market can’t just automatically fix things? Why won’t all the rational actors, you know, start acting rational?
Next thing you know, Greenspan will be telling us he’s detected another “flaw” with current economic theory.
As SteveB says above, we should be buying cheap petroleum from SA and Russia, while shale oil should largely be thought of as emergency strategic reserves, hopefully never be used, as conservation and alternative sources take root. Somehow, though, I think all those companies flaring small-country-energy-budgets worth of gas in the Permian Basin wouldn’t agree.
Gas price here $1.79 (or lower). I haven’t checked this morning.
Perhaps Trump should tell Americans to go drive around a lot (shelter in car). This would be bad for the planet but he doesn’t care about that. It would help with the cabin fever.
Why not invest in enlarging the US petroleum reserve?
Yes, the staying-at-home and avoiding-gatherings to slow the spread of corona are reducing the demand for oil.
Once all the bans and warnings are lifted, how can demand be kept low? Low enough to exterminate the frack-shale sector? Keeping it in the ground, you know.
Are there enough Real Greens in the world that they can voluntarily keep their oil use down where corona lowered it to? Are they Real enough to do it? Are they even Real enough to try?
Imagine . . . One Hundred Million Pairs of Strong Blue Hands wrapped around the neck of Frack Shale Oil.
Peter Zeihan (ex-STRATFOR) views things differently : Saudis want to fill all the tanks and the Super-tankers and all the pipe until physically, it becomes impossible to pump crude because there is nowhere to put it. The one who suffers most from this strategy are Russians because a stopped well in the article winter just freezes, and is permanently disabled, and Russians have to wait for the next winter to start a multi year re-drilling effort !
The Saudi booked 14 VLCC on top of the 42 they own for the very close future, (actually, they are already booked at the time I write these lines). As they couldn’t have produced that much oil that quickly, it means that they will empty their own storage, and not replenish it…
Essentially, Saudi Arabia is cornering oil storage. Actually, tariffs on oil plays exactly into their hands : if US based storage (tanks in Cushing and US strategic reserve) cannot be used by foreigners, it reduces storage available for foreigners, especially Russia. Once Russia producing capacity is reduced for years , oil prices can go up again to 80-100$ and the US Shale patch reboot in a matter of months.
Would not a stopped well that freezes in the Arctic winter be re-thawable in the following Arctic summer?
If not, why not?
And if not, could China buy and store-use Russian oil as fast as Russia can pump if China stopped buying any Saudi oil . . . in order to prioritize the relationship with Russia? Especially if Russia is able to pump just fast enough to keep the oil from congealing?
I’m no oil expert, but I’d wonder if most of each oil pipe is down far enough that the Arctic summer never reaches it. Is the problem that the top 50’ of the pipeline freezes, which seems fairly easy to solve, or that the whole thing will freeze in the permafrost if you aren’t continuously pumping warm water through it?