The U.S. is today showing signs of increased desperation as oil prices sink to levels that may pose a threat to the energy independence of the United States by kicking U.S. shale out of the market.
Several recent actions taken by the United States indicate that it may be attempting to change the current trajectory of the global oil market, including by showing interest in stepping up negotiations with Saudi Arabia, which is spearheading the ongoing market share war that is fostering ultra-low oil prices.
Drastic Times Call for Drastic Measures
The United States is facing a national emergency. The Covid-19 pandemic in the world’s largest oil consumer, The United States, has dented demand to the extent that a couple months ago, no one thought possible. The virus struck—first in the world’s largest oil importer, China--at a time when the oil markets were already concerned about a global oversupply.
The virus also struck around the same time that another critical oil-market event took place: the end of the OPEC+ production cut agreement and the start of the oil price war—with Saudi Arabia on one side and Russia on the other.
The result is that the U.S. shale industry, often touted as the backbone of the U.S. energy independence movement, has found itself caught in the middle between the oversupplied oil market and severely hampered oil demand.
And it looks like the government is getting worried.
Saudi Envoy
On Monday evening, the U.S. made the decision to appoint Victoria Coates as special energy representative to Saudi Arabia. While the United States insists that this was in the works for quite some time, even before the oil war began, the timing coincides rather nicely with the shocking price drop for the US crude grade West Texas Intermediate, which is now trading around $23 per barrel, down from $60-something per barrel at the beginning of the year. Related: The Boldest Permian Plays To Watch As The Oil Market Circles The Drain
This $23 per barrel is not sustainable long term—perhaps not even short term—creating a sense of urgency in the United States to address the problem.
And who better to address than the perceived perpetrator of the oil price war, Saudi Arabia.
At the beginning of the oil price slide, the Trump Administration was singing the praises of the low oil prices. For consumers in the United States, lower oil prices mean an easing of cost of living expenses, freeing up money to spend on other things, and bolstering the economy in the process. This is all positive for consumers.
But it became clear rather quickly that oil prices were sinking far too low to be sustainable for the oil industry, and for the economy. Low gasoline prices mean very little when people aren’t leaving their homes to drive anywhere, as is the case now for nearly half of all Americans, so the single benefit of low oil prices will not be realized. These stay-at-home restrictions and lack of call for gasoline are contributing to the lack of demand and helping to push prices even lower.
The government has since shown signs of its panic—oil prices are too low, and something must give, and soon. That “something”, the U.S. hopes, will be Saudi Arabia.
Enter Victoria Coates.
When United States announced this week that it had appointed a new special energy envoy to Saudi Arabia, the Administration said it was “to ensure the Department of Energy has an added presence in the region.”
Coates was a critical component of the negotiations with Iran and Trump’s Middle East policy creation during her time at the White House, which ended in February when she moved to the Department of Energy.
The announcement comes about a week after President Trump, at a coronavirus briefing, said the U.S. would intervene in the oil war, stressing the U.S. had “a lot of power over the situation” and was “trying to find some kind of medium ground.” Related: The Real Reason Oil Prices Crashed
Despite the timing, the U.S. is not owning the fact that Coates’ new assignment and the oil price war have any noteworthy link.
Lawmakers Out for Blood
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But the move comes after intense pressure from U.S. lawmakers and others in the industry in recent weeks, some of who have urged President Trump to take the extreme stance of embargoing Russian and Saudi Arabian oil. Other calls to action include the Texas Railroad Commission’s suggestion to use pro-rationing that would force Texas producers to curb production—something that is unthinkable in America.
Mississippi Senator Roger Wicker and Oklahoma Senator Inhofe asked the Department of Commerce to slap a tariff on foreign oil, citing national security reasons.
Other ideas include outright conspiring—albeit in a somewhat unofficial capacity—with Saudi Arabia to coordinate production.
These rare developments and proposals all indicate one thing: the oil price war is hurting U.S. shale, and the government is worried. Energy security, energy dependence, and a significant portion of the economy are all riding on U.S. shale’s ability to outlast Saudi Arabia or Russia in the oil price war.
And while U.S. shale was the one to show remarkable fortitude the last time Saudi Arabia tried to squeeze it out of the market, the coronavirus component this time around, combined with what many see as an unhealthy debt load, have led to some question whether U.S. shale has what it takes this time around.
By Julianne Geiger for Oilprice.com
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Still, the Trump administration will be forced to rescue the industry and enable it to remain alive even on a life support machine. The administration will eventually write off the hundreds of billions of dollars of debts the $7-trillion industry which employs 2% of the US work force currently owes not only because of its importance for the US economy but also because it enables the United States to have a say in the global oil market along Russia and Saudi Arabia.
Other actions being considered range from forcing Saudi Arabia to end the price war to embargoing Russian and Saudi oil exports or cutting shale oil production to slapping a tariff on foreign oil imports or even colluding with Saudi Arabia to create a new cartel aimed against Russia.
Still, nobody can save a bankrupt industry for ever. It will be no more in 4-9 years from now.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London