Steve A. Stone
Is the oil war only an oil war?
By Steve A. Stone
Dear Friends and Patriots,
Are you loving those cheaper gas prices? It's like getting a small pay raise, isn't it? But, let's look a bit deeper and consider who all is winning, who all is losing, and why the game is being played at all. It may not be quite as you think.
This "oil war" thing started off at the 5 March OPEC meeting in Vienna. Saudi Arabia was concerned that the price of oil had been languishing in the $50/bbl. range for quite a while. They were having problems with deficit spending at that price point. They went to Vienna to propose production cuts to drive the world price of oil up a bit. The Russian oil minister, acting on orders from the Kremlin, shouted "NYET!" which is Russian for "HECK NO!" or something much like that. Russia wasn't agreeing to any cutback in production. They were making sufficient profits at the prevailing price point, and, besides, they perceived a strategic opportunity at hand.
Everyone in the world was focused on the COVID-19 pandemic. It seemed as if no one was paying much attention to oil at all. But, because businesses everywhere were shutting down and laying off workers, and national governments had imposed a whole range of travel restrictions and were likely to do more, the demand for oil was spiraling in the wrong direction. In a sense, the Saudis were exactly right. In order to stabilize the price of oil in the $50/bbl. range, much less cause the price to rise a bit, production cutbacks would be necessary. Though the Saudis wanted to cause it to rise, it's unlikely it would have done so in any case. World demand trends wouldn't have supported that. The usual incremental production cutbacks in today's oil business climate would find softening demand keeping pace with the reduced stream of new oil. At least, it would in the near term. Keep in mind the COVID-19 pandemic won't last a much longer.
Russia sensed an opportunity. A risky one, but one they wanted to at least attempt. They announced their intent to increase production quotas to drive the price downward. They were pretty open about their strategy. They want the price of oil to go down enough to shut down America's oil shale fracking industry once and for all. They learned from the Saudi's attempt to do the same thing in 2014-2015 that our break-even on that industry is in the mid-$20 range. The Saudis really paid a huge price to figure that tidbit out. The Russians think they can tank the market price and outlast any efforts to boost it back up. Think of it this way, in a climate of declining demand, they don't have to increase production by much to get the desired effect. If demand was going up, it would be much harder and costly. Russia is striking now to conserve as much of its national "rainy day" fund as possible. They actually have some pretty deep pockets, thanks to a years-long national austerity program instituted by Vladimir Putin.
The Saudis didn't react the way they have in the past. Usually, they quietly go ahead according to their own plans even if OPEC doesn't endorse it. But, this time, instead of cutting production as they had announced, they wanted to they been working to boost their production by as much as 2 million barrels/day and initially set their asking price in the $30 range. How do you spell collusion? Look at the scene being painted by the Russians and Saudis. This is collusion.
The Saudis aren't in the strongest financial condition to play this game. As it was, they had wanted the production cutbacks in hopes of driving up prices and mitigating a certain national budget deficit. Think of that – the Saudis have been running deficits for several years. It seems impossible, but it's true. They have a comprehensive welfare state to support and need the price of oil to be at least $100/bbl. for their treasury to break even. That's true, even though their cost of production is around $5/bbl., five times less than it costs to produce a barrel of fracked oil in the US.
It's most likely this strategy was created in the Russian Federation without any Saudi input. It's also possible the Saudis were taken by surprise at the OPEC meeting on the 5th. But, their reaction to it all indicates they are full and willing partners with the Russians in this latest move to crash the US economy. Yes, you read that right – to crash the US economy.
This is not just about oil. It might be on an average day, but today's not average. Today, the entire world is trying to understand and cope with a declared pandemic, and most political and economic energy is focused there. Today, the world's supply chains are disrupted due to measures taken in many nations to minimize the potential of spread of COVID-19. Production in many affected areas is reduced due to plant closures or worker no-shows. People in many places are anticipating shortages and have begun to hoard certain commodities. The commercial and financial markets are experiencing a high degree of chaos, but not collapse. Collapse might come if the markets find cash hard to come by, which is the main reason the Trump administration and the Fed are focused on market liquidity. There is a question that needs to be posed. If the world wasn't in turmoil already over COVID-19, would the Russians and Saudis be ganging up to create more chaos by their scheme to crash the US oil industry? I think not. But, I don't assert there's pre-planned collusion involved. That would be to infer there's a role China's been playing in the oil war.
Toy with that idea for a moment, if you will. Is it possible that part of this oil price war is also intended to directly benefit China? After all, their industry base is affected more than any other country in dollar-cost terms, and in real terms, probably second only to Italy. Is there a thought by Russia and the Saudis that the oil war will benefit China by providing them with dirt-cheap energy, while also aiding in weakening the US case for tariffs on Chinese products? That's a complicated scenario, because most current Chinese oil imports come from Iran. Still, the price of oil is the price, isn't it? Just think about it.
Many were surprised when President Trump announced the plan to fund the COVID-19 response, and said there would be relief offered to the oil producers and also to fill up the National Strategic Petroleum Reserves. Superficially, those announcements may not have made sense, but when taken in consideration of knowledge of the Russian and Saudi strategies and actions, it does. It's not in our nation's strategic or economic interest to have fracking companies and oil producers going out of business. Oil revenues and taxes on the entire oil producing enterprise underpins our current revenue base. President Trump has wisely chosen to support the petroleum industry to ensure we can maintain our current market dominance.
This is something of a waiting game. The COVID-19 situation will resolve in a matter of weeks or a few short months. That is a certainty. When the number of new infections begins to abate, we should see rapid responses in the supply chain and in the financial markets. Things will improve so fast it'll make our heads spin. Look for that to happen no later than July. The stock market will zoom skyward, though the Dow probably won't get back in the 26,000 point territory this year. America will once again be on a fast track. Nothing is fundamentally wrong, either in industry or in our financial sector. The administration's strategy is to bolster weaker parts of the economy until the turnaround, to sustain as many companies as possible to ensure when the upturn comes our business base can just crank up instead of having to be rebuilt from scratch. The majority of the support to be offered will be low or no-interest loans to help businesses weather the economic storm.
Once industries begin to get back to normal their energy demand will commensurately ramp up. Things will return to some semblance of normalcy in relatively short order. But, what of oil? What should we expect to see in that marketplace? I think it's reasonable to see President Trump acting relatively soon. He may not do so immediately, because the lower price of gasoline and other petroleum products is a direct benefit to our people and economy. But for how long? The administration won't want to prop up our domestic energy sector longer than absolutely necessary. Look for President Trump to approach the Saudis. They're the weak partner in this oil war. They're the nation that will have the harder time holding out. Their pockets aren't as deep as the Russians, and they already didn't like the drain on their royal coffers when oil was at $50+. They can be cajoled out of their current partnership with the Russians, and President Trump won't have to bribe them to get their cooperation. After all, they still have that problem with Iran we're helping them with. Just because the Iranians are coping with a severe outbreak of COVID-19 now doesn't mean they won't be back to their threatening posture in a few short months. The Saudis need us far more than we need them.
If you're something of a hoarder, or maybe even if you aren't, you might want to invest in some jerry cans. Look around and try to buy some used gas containers. The new ones are crazy expensive. Stockpile some gasoline and maybe even some diesel fuel while the prices are down. Just remember to buy some fuel stabilizer if you intend to store a whole lot. Gasoline is good for about a year before it degrades to the point you don't want to burn it in your car. Diesel is something I wouldn't keep more than three months without stabilizing. But, think about it. Strike while this iron is hot. After all, you'll be enjoying a market subsidy courtesy of Vladimir Putin. If he's buying the round, why shouldn't we drink up? It's temporary. Stop wasting your time in Walmart chasing that next roll of toilet paper. That's just silly. Buy something really valuable. Buy some cheap fuel!
Meanwhile, remember to maintain your social distance and sing Happy Birthday while you wash your hands. Be safe!
In Liberty,
Steve
© Steve A. Stone
March 23, 2020
Dear Friends and Patriots,
Are you loving those cheaper gas prices? It's like getting a small pay raise, isn't it? But, let's look a bit deeper and consider who all is winning, who all is losing, and why the game is being played at all. It may not be quite as you think.
This "oil war" thing started off at the 5 March OPEC meeting in Vienna. Saudi Arabia was concerned that the price of oil had been languishing in the $50/bbl. range for quite a while. They were having problems with deficit spending at that price point. They went to Vienna to propose production cuts to drive the world price of oil up a bit. The Russian oil minister, acting on orders from the Kremlin, shouted "NYET!" which is Russian for "HECK NO!" or something much like that. Russia wasn't agreeing to any cutback in production. They were making sufficient profits at the prevailing price point, and, besides, they perceived a strategic opportunity at hand.
Everyone in the world was focused on the COVID-19 pandemic. It seemed as if no one was paying much attention to oil at all. But, because businesses everywhere were shutting down and laying off workers, and national governments had imposed a whole range of travel restrictions and were likely to do more, the demand for oil was spiraling in the wrong direction. In a sense, the Saudis were exactly right. In order to stabilize the price of oil in the $50/bbl. range, much less cause the price to rise a bit, production cutbacks would be necessary. Though the Saudis wanted to cause it to rise, it's unlikely it would have done so in any case. World demand trends wouldn't have supported that. The usual incremental production cutbacks in today's oil business climate would find softening demand keeping pace with the reduced stream of new oil. At least, it would in the near term. Keep in mind the COVID-19 pandemic won't last a much longer.
Russia sensed an opportunity. A risky one, but one they wanted to at least attempt. They announced their intent to increase production quotas to drive the price downward. They were pretty open about their strategy. They want the price of oil to go down enough to shut down America's oil shale fracking industry once and for all. They learned from the Saudi's attempt to do the same thing in 2014-2015 that our break-even on that industry is in the mid-$20 range. The Saudis really paid a huge price to figure that tidbit out. The Russians think they can tank the market price and outlast any efforts to boost it back up. Think of it this way, in a climate of declining demand, they don't have to increase production by much to get the desired effect. If demand was going up, it would be much harder and costly. Russia is striking now to conserve as much of its national "rainy day" fund as possible. They actually have some pretty deep pockets, thanks to a years-long national austerity program instituted by Vladimir Putin.
The Saudis didn't react the way they have in the past. Usually, they quietly go ahead according to their own plans even if OPEC doesn't endorse it. But, this time, instead of cutting production as they had announced, they wanted to they been working to boost their production by as much as 2 million barrels/day and initially set their asking price in the $30 range. How do you spell collusion? Look at the scene being painted by the Russians and Saudis. This is collusion.
The Saudis aren't in the strongest financial condition to play this game. As it was, they had wanted the production cutbacks in hopes of driving up prices and mitigating a certain national budget deficit. Think of that – the Saudis have been running deficits for several years. It seems impossible, but it's true. They have a comprehensive welfare state to support and need the price of oil to be at least $100/bbl. for their treasury to break even. That's true, even though their cost of production is around $5/bbl., five times less than it costs to produce a barrel of fracked oil in the US.
It's most likely this strategy was created in the Russian Federation without any Saudi input. It's also possible the Saudis were taken by surprise at the OPEC meeting on the 5th. But, their reaction to it all indicates they are full and willing partners with the Russians in this latest move to crash the US economy. Yes, you read that right – to crash the US economy.
This is not just about oil. It might be on an average day, but today's not average. Today, the entire world is trying to understand and cope with a declared pandemic, and most political and economic energy is focused there. Today, the world's supply chains are disrupted due to measures taken in many nations to minimize the potential of spread of COVID-19. Production in many affected areas is reduced due to plant closures or worker no-shows. People in many places are anticipating shortages and have begun to hoard certain commodities. The commercial and financial markets are experiencing a high degree of chaos, but not collapse. Collapse might come if the markets find cash hard to come by, which is the main reason the Trump administration and the Fed are focused on market liquidity. There is a question that needs to be posed. If the world wasn't in turmoil already over COVID-19, would the Russians and Saudis be ganging up to create more chaos by their scheme to crash the US oil industry? I think not. But, I don't assert there's pre-planned collusion involved. That would be to infer there's a role China's been playing in the oil war.
Toy with that idea for a moment, if you will. Is it possible that part of this oil price war is also intended to directly benefit China? After all, their industry base is affected more than any other country in dollar-cost terms, and in real terms, probably second only to Italy. Is there a thought by Russia and the Saudis that the oil war will benefit China by providing them with dirt-cheap energy, while also aiding in weakening the US case for tariffs on Chinese products? That's a complicated scenario, because most current Chinese oil imports come from Iran. Still, the price of oil is the price, isn't it? Just think about it.
Many were surprised when President Trump announced the plan to fund the COVID-19 response, and said there would be relief offered to the oil producers and also to fill up the National Strategic Petroleum Reserves. Superficially, those announcements may not have made sense, but when taken in consideration of knowledge of the Russian and Saudi strategies and actions, it does. It's not in our nation's strategic or economic interest to have fracking companies and oil producers going out of business. Oil revenues and taxes on the entire oil producing enterprise underpins our current revenue base. President Trump has wisely chosen to support the petroleum industry to ensure we can maintain our current market dominance.
This is something of a waiting game. The COVID-19 situation will resolve in a matter of weeks or a few short months. That is a certainty. When the number of new infections begins to abate, we should see rapid responses in the supply chain and in the financial markets. Things will improve so fast it'll make our heads spin. Look for that to happen no later than July. The stock market will zoom skyward, though the Dow probably won't get back in the 26,000 point territory this year. America will once again be on a fast track. Nothing is fundamentally wrong, either in industry or in our financial sector. The administration's strategy is to bolster weaker parts of the economy until the turnaround, to sustain as many companies as possible to ensure when the upturn comes our business base can just crank up instead of having to be rebuilt from scratch. The majority of the support to be offered will be low or no-interest loans to help businesses weather the economic storm.
Once industries begin to get back to normal their energy demand will commensurately ramp up. Things will return to some semblance of normalcy in relatively short order. But, what of oil? What should we expect to see in that marketplace? I think it's reasonable to see President Trump acting relatively soon. He may not do so immediately, because the lower price of gasoline and other petroleum products is a direct benefit to our people and economy. But for how long? The administration won't want to prop up our domestic energy sector longer than absolutely necessary. Look for President Trump to approach the Saudis. They're the weak partner in this oil war. They're the nation that will have the harder time holding out. Their pockets aren't as deep as the Russians, and they already didn't like the drain on their royal coffers when oil was at $50+. They can be cajoled out of their current partnership with the Russians, and President Trump won't have to bribe them to get their cooperation. After all, they still have that problem with Iran we're helping them with. Just because the Iranians are coping with a severe outbreak of COVID-19 now doesn't mean they won't be back to their threatening posture in a few short months. The Saudis need us far more than we need them.
If you're something of a hoarder, or maybe even if you aren't, you might want to invest in some jerry cans. Look around and try to buy some used gas containers. The new ones are crazy expensive. Stockpile some gasoline and maybe even some diesel fuel while the prices are down. Just remember to buy some fuel stabilizer if you intend to store a whole lot. Gasoline is good for about a year before it degrades to the point you don't want to burn it in your car. Diesel is something I wouldn't keep more than three months without stabilizing. But, think about it. Strike while this iron is hot. After all, you'll be enjoying a market subsidy courtesy of Vladimir Putin. If he's buying the round, why shouldn't we drink up? It's temporary. Stop wasting your time in Walmart chasing that next roll of toilet paper. That's just silly. Buy something really valuable. Buy some cheap fuel!
Meanwhile, remember to maintain your social distance and sing Happy Birthday while you wash your hands. Be safe!
In Liberty,
Steve
© Steve A. Stone
The views expressed by RenewAmerica columnists are their own and do not necessarily reflect the position of RenewAmerica or its affiliates.
(See RenewAmerica's publishing standards.)
