On March 8, 2020, Saudi Arabia initiated a price war with Russia, facilitating a 65% quarterly fall in the
price of oil. Over a few weeks, US crude oil fell by 26% and Brent oil fell by 24%. The price war was
triggered by a breakup in dialogue between OPEC (Organization of the Petroleum Exporting Countries)
and Russia over proposed oil production cuts in the midst of the 2019-2020 coronavirus pandemic.
Russia walked out of the discussion, leading to a breakup of OPEC+ (14 OPEC members + 10 other oil
producing nations). Oil prices had already fallen 30% since the start of the year due to a drop in demand.
The price war is one of the major causes and effects of the on-going global stock market correction.
Short-Term Observations and Long-View Considerations
- The conflict showed little regard for setting off a potential credit crisis among global banks with
- outstanding loans to highly indebted companies (particularly shale producers in the U.S.)
- END GAME SCENARIO. A backdoor attempt to drive competitors into bankruptcy and shore up prices that way
- Saudi’s production cost is estimated to be $8-9, Russia $19, and US Shale/Texas Basins (low-end
- $20s-30s, high end $46-54); US Shale/Bakken Williston Basin (NDakota/Montana) $23-70
- Fossil fuel abundance and climate change policy threaten the future prosperity of the so-called ‘producer economies’
- Recent meetings and publications by international organizations signal that producer economies must change their economic development models
- Recent forecasts and scenarios highlight the uncertainty that exists when it comes to assessing future ‘peak global oil demand’ as opposed to ‘peak oil supply’
- The OECD’s (Organization for Economic Co-operation and Development) oil demand peaked in 2005 and many of the world’s largest oil consumers have since peaked or are now experiencing slowing in demand
- Some see peak demand coming in the 2020s, others in the 2030s (Wood MacKenzie 2036) ExxonMobil is an outlier assuming it won’t have peaked by 2040
- Overturns the assumption that oil producing economies rationed their oil supplies in the belief that a barrel not produced today would be worth more when produced in the future
- Saudi Arabia has a diversification strategy, while Russia is on a path to increase its reliance on oil and gas exports
- To balance their fiscal budgets, Saudi Arabia needs $80/barrel, Russia $45.
- Climate Change mitigation threatens producers’ prosperity and influence
- PRODUCER MANTRA. No country should have to sacrifice economic prosperity or energy security in pursuit of environmental sustainability
- REALITY/NEW OIL ORDER. The shale revolution has heralded an era of ‘fossil fuel abundance’ but the rapid growth of renewable power generation is challenging the role of fossil fuels in the energy mix—particularly coal and gas—and making possible an electrification pathway to low carbon transportation that will negatively impact oil demand
- RECENT DEVELOPMENT. OPEC+, with sparring countries Saudi Arabia, Russia, and Mexico finally reaching a consensus production reduction agreement, agreed to drop daily production by 9.7 million barrels/day. Problem is, from a price support standpoint, that daily usage is forecast to decline as much as 25mm Bbl/day.
- CURRENT US RESPONSE. Shutting wells. Trump administration weighs paying drillers to leave oil in the ground amid glut. Possible addition of 23mm barrels to US Strategic Petroleum Reserve.
- CRYSTAL BALL PROGNOSIS. Lower oil prices ahead where only the most cost-competitive oil will be produced, notwithstanding the impact of geopolitics
While it is logical on the surface to conclude that Saudi Arabia and Russia are myopically focused on
holding market share, it is far more complex than that. By unifying with other OPEC members to support
the price of oil historically, they in a sense facilitated more US shale development, thereby undermining
their own efforts. Hence, a new more Machiavellian strategy may be in play.
In sum, the falling cost and growth of low carbon energy sources and the emphasis on decarbonization
means that the dominance of fossil fuels is being challenged. And that it may be near-term aided and
abetted by a post-pandemic, slow growth (as opposed to a U-Shaped or V-Shaped) global economic