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Trump’s Promised Oil Deal Still Eludes Big Producers as Prices Dive Again
But Saudi Arabia and Russia appear to be thinking twice about their oil war as their economies start to feel the pain.
Major oil producers edged closer to a brokered solution promised by U.S. President Donald Trump as a weekslong bloodletting in the markets slammed their economies, but it appeared any such deal won’t come for a few more days at least after Russia and Saudi Arabia renewed their war of words over the weekend.
The United States, meanwhile, scrambled to find a way to curtail its own production and secure the desperately needed cooperation of those other two countries.
OPEC and other big oil-producing countries were meant to have a virtual meeting Monday to divvy up production cuts that could restore a semblance of balance to a market that has been driven badly out of whack by the global economic collapse due to the coronavirus pandemic, but that meeting has been pushed back until Thursday, at least. And Saudi Arabia and the International Energy Agency are pushing for a meeting on Friday of G-20 countries to both ensure output cuts and find a way consuming countries can park unwanted oil for the time being.
Oil prices skyrocketed last week after Trump assured the world that the United States, Russia, and Saudi Arabia had reached an agreement to cut oil production and shore up plummeting prices—but the elusive agreement has yet to be nailed down. As a result, oil prices are heading south again, with crude in both New York and London down about 5 percent, returning close to the economically disastrous prices before last week’s mini-rally.
If Russia and Saudi Arabia both blundered into the oil war exactly a month ago, the global economic toll of COVID-19 and the shutting down of many major economies have changed their thinking. For Saudi Arabia, its willingness to convene a broader meeting this week of OPEC countries and other big producers—coupled with its first-ever delay of setting the sales prices for next month’s exports of oil—point to a newfound willingness to reverse course on the open-the-taps strategy it put into practice at the beginning of March.
For the Kremlin, a growing willingness to reach a deal reflects alarm at the economic effects of the pandemic—and the fact that its risky gambit to kneecap U.S. oil production was waylaid by Saudi Arabia’s own push to flood the market and drive down oil prices. That has Moscow, which just a month ago blew up that previous agreement with Saudi Arabia to prop up prices by voluntarily capping output, suddenly open to a deal.
“I think the whole market understands that this deal is important and it will bring lots of stability, so much important stability to the market, and we are very close,” Kirill Dmitriev, the CEO of the Russian Direct Investment Fund, Russia’s sovereign wealth fund, told CNBC during an interview on Monday.
But Moscow’s more conciliatory approach should not be seen as a sign that its fracture with Saudi Arabia is healed, said Maxim Suchkov, an expert at the Russian International Affairs Council and Moscow State Institute of International Relations, a university run by the Russian foreign ministry. Moscow has increasingly blamed Saudi Arabia for starting the price war—all while holding out hopes that its original strategy of driving high-priced U.S. oil companies out of business will ultimately pay off.
“We could have temporary cuts agreed to this week with or without the United States, just to see how the market behaves against the backdrop of COVID-19,” Suchkov said. He said that it remains to be seen whether the virus pandemic and the ensuing market shocks have completely derailed the Kremlin’s ambitions to claw back its share of the oil market from expansive U.S. producers.
“It’s a major gamble,” Suchkov said. “[The Kremlin] has accepted a tactical loss in the hopes of a larger strategic win.”
Even with both those countries seemingly warming to the idea of major production cuts, there are a couple of big problems. First, the scale of what’s under discussion now—perhaps 6 million barrels a day, to judge from Saudi indications; perhaps 10 million barrels a day to judge from Trump’s tweets—pales in comparison to the unprecedented decline in global demand for oil. Experts figure that the global shutdown, combined with extra production this past month, has left a whopping 24 million extra barrels of oil per day sloshing around the market.
Until that supply glut is worked off, any agreement this week to cut output will be a Band-Aid, though a useful one. “In the short term, a cut this size makes no difference,” said Kevin Book, managing director of Clearview Energy Partners, a consultancy. “But there’s still a reason to slow the fill of global inventories: not to find a price floor, because there isn’t one, but simply to control the descent.”
The other big problem is that, unlike Russia or Saudi Arabia, the United States, especially during the shale boom, has had a hard time telling its highly fragmented oil sector what output and investment decisions to make. Since the Saudis insist that Russia go along with any joint output cuts, and Russia insists that the United States commit to output cuts of its own, that makes it hard for the United States to convince those other two big producers that it will equitably share in the cuts and not just continue to be a free rider.
“There is a fundamental difference between Saudi Arabia and Russia on the one hand and the United States on the other in terms of how to deal with market-driven cuts,” said Carlos Pascual, senior vice president for global energy at IHS Markit, an energy consultancy. “They are going to be looking for some guarantee that if they sustain their own production cuts, what assurance do they have that the United States doesn’t just add production later?”
That could be one of the hardest pieces to resolve in securing a three-way agreement, said Pascual, who formerly served as the top U.S. international energy envoy.
Indeed, the oil-market rollercoaster over the last month, and the devastating threat it poses to companies and jobs in the U.S. oil patch, has illustrated the limits of America’s much-vaunted “energy dominance.” For years, the United States leveraged world-beating production of oil and gas to throw its weight around, finally free to levy devastating oil sanctions on Iran and Venezuela, and hoping to blunt Russia’s traditional energy dominance in Europe.
Now, though, the United States finds itself begging Russia and Saudi Arabia to ride to the rescue and help prevent a bloodletting in a big U.S. industry.
“What this says is that if the United States wants to maintain the power that it has from being a major oil producer, that has its limits—you can’t go around antagonizing the people who are keeping that market in equilibrium,” said Randolph Bell, director of the Global Energy Center at the Atlantic Council. “We have to recognize that ultimately, we don’t have as much leverage on the oil market as we thought we had.”
After a Friday meeting with oil executives at the White House, Trump dismissed any immediate action to shut down some U.S. oil production. Instead, he has toyed with other sticks and carrots to either prod Russia or Saudi Arabia into taking action on their own, or to at least shield the U.S. industry from the worst of the price collapse. But a solution has been elusive: the United States emerged as an energy power precisely because OPEC and other big producers restrained production to prop up prices enough to make that possible.
“We’ve been benefiting from the lack of a free market for so long, the administration is torn about how to keep us a major producer while ostensibly keeping a free market, and I don’t think there’s a way to square that circle,” Bell said.
Over the weekend, Trump repeatedly raised the threat of tariffs on imported crude as a way to protect U.S. producers from overseas competition. Congress has threatened Saudi Arabia with a halt to military assistance if it continues to wage “economic warfare” on the U.S. oil patch. Trump has even raised the notion of relaxing some oil-sector sanctions on Russia as a way to buy Moscow’s support for bailing out shale. And still under consideration is a huge, $20 billion to $30 billion plan for the U.S. government to buy excess American oil and stash it away in storage—essentially taking it off the market for now, which would amount to the same thing as a production cut.
But all those ideas are problematic. Tariffs would raise the cost for some imported grades of oil that U.S. refiners need to use instead of American oil, while potentially limiting export markets overseas for all that U.S. crude flooding the market.
“Tariffs on imports could risk a backlash for American exporters,” Pascual said. “We absolutely need to export that light oil, and if we impose tariffs on imports, then we could face tariffs on U.S. exports. It could prove a dangerous precedent to set.”
Congress is unlikely to go along with any effort to relax sanctions on Russia. What’s more, any move in that direction would risk being counterproductive for the U.S. energy sector in the longer term, as it would breathe new life into Russia’s now-blocked ability to pump oil in the Arctic and from other frontier plays, making it a more formidable rival to U.S. producers down the road.
And buying huge amounts of U.S. oil to stick in storage, while an apparent solution to the immediate glut, would likely need the go-ahead from Congress for the funding. And as the political battle over the recent $2 trillion stimulus package showed, Democrats will expect to extract huge concessions for their own ambitions on promoting renewable energy and fighting climate change if they are to pony up billions to save the oil industry, Book, of Clearview Energy Partners, said. That may be too steep a price for the oil patch to pay if it leads to a yearslong shift away from fossil fuels.
There are other, even more radical proposals out there to curb U.S. production and smooth the way to an international accord. Trump administration officials have reportedly mulled the idea of ordering a halt to all offshore oil production in the Gulf of Mexico, which they can do because that is federal property. State regulators in Texas are increasingly revisiting the idea of production quotas, a throwback to how the U.S. oil business worked half a century ago.
That’s part and parcel of the U.S. transition under Trump toward more of a command economy and less of a free-market economy.
“This is command capitalism on the rise,” Book said. He cited the U.S. embrace of cartel-style production curbs as just the latest move toward managed trade, protective barriers, forced reshoring, and other steps away from a pure free-market approach that has become increasingly evident in the last three years, and especially given the state-led economic response everywhere to the virus outbreak.
“This is an era of managed markets, and maybe not even markets,” he said.
Paradoxically, that is one development that raises the prospect of a breakthrough, perhaps as soon as this week.
“It seems a strange time to seem optimistic about unprecedented global cooperation when everything is trending toward economic nationalism,” he said. “But it’s not crazy that people could come together [to reach a deal] because governments are in charge of everything now.”
Keith Johnson is a senior staff writer at Foreign Policy. Twitter: @KFJ_FP