Butterfly Effect: Russia’s Coming After America’s Shale
WHY YOU SHOULD CARE
Tired of cutting crude production while U.S. shale oil grows, the Russian president is attempting a judo throw. America had better watch out.
“Good for the consumer, gasoline prices coming down!”
As the world bounces between crises, from the fast-spreading coronavirus to a fresh crush of refugees at Europe’s borders, President Donald Trump found this “good” news to tweet early Monday. A rapidly escalating battle between Saudi Arabia and Russia on oil production has sparked the biggest crash in crude prices in nearly three decades. Yet the battle is far closer to home for Americans than you might think.
Riyadh’s just a proxy. Russia’s real war is with the U.S. shale oil industry.
Brent crude, the global benchmark, was down 24 percent by the end of Monday, at just over $33 a barrel. Oil prices in the U.S. were down 34 percent, to a little above $27 a barrel. Indeed, if it weren’t for the fact that travel’s probably not your top priority at the moment — we hope washing your hands is — now would be a good time to fill the car tank, press the accelerator and head off on a long road trip.
But take a look at the reasons behind those numbers, and the picture is far from pretty. For the past three years, Russian President Vladimir Putin has partnered with the Saudi-led OPEC cartel of oil-exporting nations to regulate the production and prices of crude. As demand dipped because of China’s economic slowdown in 2018 and 2019, Russia and OPEC curtailed oil production so prices would remain steady.
That understanding between Putin and Saudi Arabia’s Crown Prince Mohammed bin Salman — aka MBS — is broken, at least for now. With the coronavirus scare crippling multiple Chinese industries, the world’s largest buyer of oil has dramatically cut its import of crude. That prompted OPEC to call an emergency meeting with Russia at its Vienna headquarters last Friday. The agenda was simple: Countries needed to slash oil production further to keep prices up.
But Russia’s calculation was equally clear. While OPEC and Russia have restricted oil production these past three years, America’s shale industry has expanded dramatically, meeting the global demand for cheaper oil and significantly expanding its market share. U.S. crude oil production has grown 160 percent since 2008. In the last week of February, the U.S. exported more than 4 million barrels of oil daily, up 24 percent from the previous year. Last September, the U.S. briefly overtook Saudi Arabia as the world’s leading exporter of oil. And the International Energy Agency estimates that by the end of 2020, the U.S. — which for decades has depended on oil imports — might finally become a net exporter.
Last Friday, Putin decided he had had enough, refusing to accept more cuts in production. Saudi Arabia retaliated, cutting state-determined prices to make sure it didn’t lose its share of the oil market, sending global stocks — already reeling because of the coronavirus — into a tizzy. On Tuesday, both Saudi Arabia and Russia announced plans to increase production, deepening the fissure, though Moscow said it was open to future negotiations with OPEC.
And America, which managed to insulate itself from the economic downturn in Europe and China last year, will struggle to remain unaffected this time — never mind how Trump spins the crisis or who he blames for it. The S&P 500 fell 7.6 percent Monday, recovering partly on Tuesday. The crash in oil prices might sink some smaller shale oil producers, many of whom have taken hefty loans. Giants with deep pockets such as Exxon Mobil Corp. and Chevron, which own many shale wells, should be able to ride out the price cuts. But they’re hurting too. On Monday, Exxon Mobil shares witnessed its biggest drop since 2008.
To be sure, the pain will be shared around the oil-producing world. Russia, where the budget is pegged to the global price of crude, will suffer too. For now, it should be able to withstand the slump, as should Saudi Arabia. But if more and more oil floods the markets, Goldman Sachs is predicting that the cost of oil could come down to $20 a barrel.
Like during the Cold War, some of the most brutal effects of this tussle will be seen in third countries with few stakes in the U.S.-Russia rivalry. Nigeria, one of the world’s largest oil producers, had pegged its 2020 budget to a price of $54 for a barrel. Now, Africa’s largest economy is being forced to dramatically cut back on spending, a move that threatens to push it into a fresh recession — the last one, in 2016, was also caused by low oil prices. War-torn Iraq, whose economy also hinges on oil, will have far fewer resources for reconstruction.
For now, Russia appears willing to absorb its own losses, and allow the collateral damage to others. Its oil industry — led by Igor Sechin, a close Putin ally and the boss of Russia’s energy behemoth Rosneft — has for long cribbed about production limits. “If you always give in to partners, you are no longer partners. It’s called something else,” Rosneft spokesperson Mikhail Leontiev told Bloomberg. “Let’s see how American shale exploration feels under these conditions.”
The next few days will reveal whether Saudi Arabia continues to cut prices, and whether Russia buckles. Either way, Putin has thrown down the gauntlet. The judo-trained Russian president is not going to let American shale win without a fight. Even if that means cheaper road trips for you.