Lewis Morris / April 7, 2020

Why Is Gas Suddenly So Cheap?

An oil-price war between Saudi Arabia and Russia began before the viral shutdown.

An emergency meeting among the top global oil producers that was set to take place Monday was pushed back to later in the week as the oil-price war between Saudi Arabia and Russia continues. The two countries have been engaged in this conflict since early March, with neither apparently willing to accept production cuts that each believes will give the other country an unfair price advantage.

President Donald Trump has attempted to mediate the dispute, and his word carries weight as the U.S. position as a top oil producer has risen substantially since he took office. Last week, he recommended cuts to Russian and Saudi production, and his public suggestion that a truce could be worked out was enough to stimulate a record-breaking 25% jump in oil prices. Meanwhile, a meeting the president held with American energy producers on Friday failed to generate any signal that the U.S. is willing to ratchet back domestic oil production. Gains quickly dematerialized and further upset any potential for a deal to be reached.

The China Virus outbreak has driven down global demand significantly since March, with many countries severely limiting transportation and travel. Prices began plummeting, however, when the Saudis and the Russians entered a game of chicken in which both countries raised their oil output. The resulting global glut has had a negative effect on oil producers worldwide.

Russian oil producers have appealed to Vladimir Putin to reach a deal, but don’t count on that happening anytime soon. Putin sees an opportunity to use this crisis to gain leverage over the Saudis and the U.S. at the same time. He’s hoping that if he continues to hold out, the Saudis may be forced to cut production unilaterally, leaving Russia with the opportunity to both take advantage of the resulting higher prices and sell more oil proportionally on the global markets.

Likewise, Putin is hoping that the continued collapse in oil prices will devastate U.S. production of shale oil, which, thanks to fracking, has given the U.S. leverage on the global market. As long as U.S. fracking continues, Russia’s ability to dominate world energy markets will be squelched.

Putin’s gamble is already causing problems with the Russian economy because the country relies heavily on oil for revenue. Since he is essentially president for life, though, Putin is virtually impervious to domestic political blowback.

The American shale-oil market may be stronger than Putin thinks, but it cannot hold out forever. While oil at $20 per barrel is a nice boon for consumers, it’s based on a production schedule that won’t hold when the economy returns to normal, which it will. Trump has suggested placing tariffs on foreign oil to protect U.S. suppliers, though this does have a massive downside: Most of America’s imported oil comes from Canada, not the Middle East, and we could end up harming economic relations with our biggest trading partner with little to show in return. Additionally, U.S. refineries must import heavy crude to mix with domestic shale oil. Tariffs could lead to higher production costs without being balanced out by higher prices for shale oil.

We hope Trump concludes tariffs won’t be necessary. There is still a chance that a deal can be reached, but what shape it will take remains to be seen.

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