What Doesn’t Kill the Oil Industry Could Make It Stronger 

Can you say “free-market cartel” ten times fast?

Oil storage in Houston. Photo via Flickr.

On January 22, Pulitzer Prize–winning oil historian and energy consultant Daniel Yergin introduced a panel at the World Economic Forum called “The Future of Fossil Fuels,” featuring the Colombian minister of energy and mines, the CEO of Total, the president and CEO of PETRONAS, and the minister of energy of Saudi Arabia. Yergin kicked things off by referencing “two dramatic events in terms of oil” that had happened over the previous six months. The first was Abqaiq, when responsibility for a drone attack on a major Saudi oil facility in September was claimed by Yemen’s Houthi rebels and widely attributed to Iranian forces. The second included continuing tensions with Iran, culminating in the assassination of the Iranian Revolutionary Guards general Qasem Soleimani. Neither event had significantly impacted the price of oil, an outcome Yergin attributed in part to the diversifying rise of the US shale industry. Over the previous several years, the process known as fracking had allowed the US to become a net petroleum exporter for the first time since at least 1949, when record keeping began. Meanwhile, the low-carbon energy transition was exerting long-term pressure on the market. In light of such developments, Yergin asked his panelists what “geopolitical and economic factors” would come into play over the following two years. The word “coronavirus” was not mentioned.

Over three months and at least a quarter of a million deaths later, the global oil market, like the economy it undergirds, has been radically remade. On January 22, West Texas Intermediate crude closed at $56.74. On Monday, April 20, WTI crude oil futures for May delivery settled at negative $37.63, an all-time low and the first time it had traded below zero. In the wake of the coronavirus, global oil demand had cratered. But the oil industry had not slowed down, and those who held this future had to quickly unload it to avoid having to take physical possession of a commodity they were running out of room to store. This made for attention-grabbing headlines. “U.S. oil price crashes beyond zero as coronavirus shatters demand” read the front page of the Financial Times. But the headline left out the real cause—the self-serving obstinacy and geopolitical self-interest of the major oil powers: Saudi Arabia, Russia, and, later, the United States.

The decline occurred in three main parts: an attempt at limiting production; an all-out price war; and the formation of a geopolitically powerful hybrid of a free-market industry alliance and a traditional cartel. On January 21, the day before the Davos panel, Goldman Sachs had warned that the new coronavirus might cause a roughly three-dollar drop in the price of oil. Since late December, a mysterious respiratory virus that caused fever and pneumonia had overwhelmed hospitals in Wuhan, China, where it had likely originated. Cases had been confirmed in Japan, Thailand, South Korea, Taiwan, and the US. And Wuhan, a city of eleven million people, had been unexpectedly cut off, grounding air travel in the region. Over the past decade, China had become the world’s biggest crude importer, and even a local slow-down would have an impact on energy prices. By mid-February, the International Energy Agency predicted that, on an annual basis, the virus could curb growth in global oil consumption by roughly 30 percent. And in early March, Saudi Arabia, Russia, and other members of what is known as “OPEC+” convened a meeting to negotiate reductions in production.

But an agreement to put a floor under the price of oil seemed to Russia disproportionately advantageous to the US shale-oil industry, which, though technologically more agile, operated at a higher cost than other oil producers. Russia refused to make the proposed cuts, but then Saudi Arabia did one better, slashing their prices and ramping up production in order to claim more market share. While month-to-month changes in oil prices were “usually measured in cents and, at most, a couple of dollars,” according to a March article in Bloomberg, Saudi Arabia cut its April pricing for crude sales by as much as $8 a barrel. Despite the acceleration of the virus and the precipitous drop in global oil demand, Saudi Arabia, and then Russia, executed what might at first blush have seemed like a counterintuitive new strategy: engaging in a price war. Their main concern wasn’t that the world’s oil storage space—barrels and barges and boxcars for that matter—might eventually fill up in lieu of demand. The world’s armies of middlemen and speculative traders, not to mention oil consumers, could figure that one out.

It is folly to win the battle but lose the war, the proverb goes, and when it came to oil markets, it quickly became evident the war was over long-term market dominance and not the economic fallout caused by the new coronavirus. The price competition that Saudi and Russia were engaging in was having the desired effect, one long wished for by OPEC+: in the new, heavily discounted, low-demand price environment, the US shale industry was hurting. At first, Trump took the more obvious public position, framing the precipitous fall in oil prices as a gift to American motorists. “Good for the consumer,” he tweeted the morning of March 9, “gasoline prices coming down!” But later that day, according to Bloomberg, he was on the phone with Mohammed bin Salman or MBS, Saudi Arabia’s Crown Prince, to talk about the price war. While drops in price might benefit Americans at the pump, they simultaneously hurt a major industry and source of American employment. In a strongly worded letter sent to Secretary of State Mike Pompeo in late March, six Republican senators from oil-producing states wrote that the “Kingdom of Saudi Arabia and the Russian Federation have embarked upon economic warfare against the United States.” In effect, these US senators were asking for higher prices to protect their oil producers, something that would have been impossible to imagine before the transformation of the US into an oil-exporting superpower. “From tariffs and other trade restrictions to investigations, safeguard actions, sanctions, and much else,” wrote the senators sternly, “the American people are not without recourse.”

But it was harder for the US to control its oil markets than it was for countries run by dictators and kings. And, at least for a time, it was more economically efficient to leave even a losing rig producing in order to recuperate operational sunk costs. Trump and red state senators could promise—or threaten—whatever they pleased, but unlike MBS and Putin, they couldn’t unilaterally reduce their national oil production. During a brief window, there had been talk of revivifying the Texas Railroad Commission, which had, at least on paper, the power to force Texas frackers to slow down. “Texas commissioner’s plan for oil boils down to ‘we have to burn the free market to save the free market,’” tweeted Liam Denning, an energy opinion columnist at Bloomberg. In an op-ed in the same publication, Ryan Sitton, the Railroad Commissioner, had proposed a significant cut in Texas production if Saudi Arabia and Russia would match it. But that plan was at least temporarily shelved. Instead, between March 30, when Trump announced on Fox that he was about to dial up Putin to talk about the price war, and April 12, when OPEC+, with the explicit backing of Trump and the G20, agreed to cut production by roughly 10 percent, the extra barrels and barges and even the boxcars were quickly filling up with oil. By the time they agreed to cut their oil production by ten million barrels a day, global demand had dropped by at least two times that amount. Eight days after what was touted as an historic agreement to make cuts, the May WTI future contract traded negative—an outcome that, though particular in its contours, was the logical result of a massive and eminently predictable oversupply.

What are we to make of this? As the new coronavirus has come to dominate our world, it has become a litmus test, a Rorschach, and, perhaps most of all, a highly versatile platform. Commercial and political groups have used it to push agendas as seemingly disparate as instituting Medicare for All to burning down the 5G network. Though it might at first appear as if Covid-19 has undermined the price-stabilizing détente between OPEC+ and the US extolled by the January Davos panel, it has in important respects made it only that much stronger. “Had a whistleblower leaked to the media that Trump, Putin, and bin Salman were conspiring to raise the price of oil & gas to prop up the industry,” wrote Gary Kasparov on April 2 on Twitter, “it would be a huge scandal. Instead, Trump tweets it.”

Though the agreement forged between the remnants of OPEC+ and the US was insufficient to stanch the immediate bleeding in the virus-lacerated oil markets, it opened up a new front in the centuries-old war for long-term market-share—not one fought by producer against producer, but rather that fought against all other forms of energy. Even before the new coronavirus, growth in the oil market had been slowing for years. And with increasing global awareness of the dangers of climate change and the push for a clean-energy transition, the industry’s credibility was also in decline. What better way to shore it up than for OPEC+ to join forces with the richest and most powerful nation on earth—not to mention now the world’s biggest oil and gas producer—fighting to maintain the long-term power of the industry?

When it comes to the battles of climate change and energy, the virus offers easy wins. As of this writing, global carbon emissions are expected to be down by as much as 8 percent annually, the biggest drop in history. Many analysts have argued that the sudden crashing of the oil markets is likely to hasten peak oil demand, a milestone the world was on track to reach over the next decade in any case. The air is so much cleaner—“nature is healing,” as Twitter likes to say. But the great oil powers know better, and they are planning for the future. In their balance sheets, 2020—and even 2021 and 2022, should the virus economy continue—is in fact no time at all. What has always been an adversarial relationship between the United States and OPEC is now, in the dim, backroom light of virus politics, a once-in-a-century opportunity: to unite the major oil factions into a geopolitical economic force like the world has never seen. “The big Oil Deal with OPEC Plus is done,” Trump Tweeted after the US and OPEC+ had agreed to their reductions. “Great deal for all!” We have to hope it’s not.

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