- Oil prices have plunged as Saudi Arabia fights to claw back lost market share.
- As U.S. consumers rejoice, shale producers are fighting to stay alive amid the coronavirus-fueled demand shock.
- President Trump must strike a delicate balance between pleasing shale producers and keeping consumers happy.
Throughout his 2016 presidential campaign, Donald Trump vowed to bring back coal jobs. Four years later, U.S. coal consumption has fallen even further. And the rate of coal plant closures has only accelerated.
Trump’s not talking about coal anymore. These days, he’s focused on the damage low crude oil prices are wreaking on U.S. shale producers. And he’s stoking hopes that Saudi Arabia and Russia will strike a deal to end their devastating oil price war.
Earlier this week, the president signaled he would do everything in his power to offer support to U.S. oil, saying “you don’t want to lose an industry” as a consequence of the price war.
But time is running out as shale oil producers run out of options.
Whiting Petroleum, a leading shale producer, has already filed for bankruptcy. This comes less than a month after the Saudi Arabia-Russia oil price war started.
Trump’s strategy to nudge Saudi Arabia and Russia to call a truce won’t save U.S. shale. Because this price war has nothing to do with prices. It’s all about national interests overriding everything else.
Saudi Arabia First
The energy independence that the U.S. has achieved the past few years has come at Saudi Arabia’s expense.
In January 2017, Saudi Arabia exported an average of 1.3 million barrels of oil per day to the United States. By January 2020, this had dropped to an average of just 401,000 barrels – levels last witnessed in the 1980s.
Saudi Arabia’s calculation is that higher oil prices will just extend the shale boom. And faced with domestic fiscal constraints, volumes are the only way out. Fortunately, the Middle Eastern country enjoys the lowest oil production costs in the world.
By offering attractive discounts while increasing supply, Saudi Arabia is betting it can bring shale producers to their knees while clawing back lost market share.
And U.S. shale producers are not the only culprit. Five years ago, Russia beat Saudi Arabia to become the largest oil exporter to China.
So intent is Saudi Arabia on clawing back lost market share that it is pumping out record levels at a time of reduced demand. A time when oil storage space around the world is beginning to run out.
On April 1st, the Middle Eastern country produced a record 12 million barrels of oil.
The previous record production was 11 million barrels.
Oil demand shock is beyond Trump’s control
But even if Trump does succeed in brokering a permanent end to the supply glut, the demand shock ignited by the coronavirus pandemic makes his attempt to halt the oil price plunge an exercise in futility.
The sort of oil consumption needed to exhaust current stockpiles and lead to higher prices is just not there. Demand for oil is falling by an estimated 20 million barrels per day during the COVID-19 outbreak because consumption linked to manufacturing and travel has cratered.
To stop the oil price war, U.S. Senator Kevin Cramer of North Dakota suggested that Trump withdraw U.S. forces from Saudi Arabia if the Middle Eastern country refuses to cut back supply.
This was an interesting proposition. But would Trump’s goal of containing Iran be overridden by a desire to protect U.S. shale producers? That would represent a dramatic policy reversal on an issue that the president has been remarkably consistent on.
What will Trump do?
The White House is mulling other options, including imposing tariffs on Saudi oil imports. Trump could resort to that, but it wouldn’t stop Saudia Arabia from exporting to other countries.
The U.S. consumes 20% of the oil produced in the world daily, but there’s still 80% of the global market to compete for.
And while tariffs might offer shale producers a lifeline, consumers would be left at a disadvantage. This could destroy Trump’s manufactured persona as a fighter for the average Joe.
Remember that Trump hailed low oil prices less than a month ago:
So with gasoline prices coming down, that’s like a tax cut. Frankly, that’s like a big tax cut, not a little tax cut for the consumer.
Would the White House reverse course and welcome higher prices for U.S. consumers just to save shale producers?
Therein lies Trump’s big dilemma.
Disclaimer: This article represents the author’s opinion and should not be considered investment or trading advice from CCN.com.
Last modified: September 23, 2020 1:46 PM