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The Russia-Saudi Oil-Price War Is a Fraud and a Farce
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JAPAN-G20-SUMMIT : News Photo

The Russia-Saudi oil-price war is a fabrication concocted by the media. There’s not a word of truth to any of it. Yes, there was a dust up at an OPEC meeting in early March that led to production increases and plunging prices. That part is true. But Saudi Arabia’s oil-dumping strategy wasn’t aimed at Russia, it was aimed at US shale oil producers. But not for the reasons you’ve read about in the media.

The Saudis aren’t trying to destroy the US shale oil business. That’s another fiction. They just want US producers to play by the rules and pitch in when prices need support. That might seem like a stretch, but it’s true.

You see, US oil producers are not what-you’d-call “team players”. They don’t cooperate with foreign producers, they’re not willing to share the costs of flagging demand, and they never lift a finger to support prices. US oil producers are the next-door-neighbor that parks his beat-up Plymouth on the front lawn and then surrounds it with rusty appliances. They don’t care about anyone but themselves.

What Putin and Saudi Crown Prince Mohammed bin Salman want is for US producers to share the pain of oil production cuts in order to stabilize prices. It’s an entirely reasonable request. Here’s a clip from an article at oilprice.com that helps to explain what’s really going on:

“… there was a sliver of hope that oil prices may rebound after Reuters reported that Saudi Arabia, Russia and allied oil producers will agree to deep cuts to their crude output at talks this week but only if the United States and several others join in with curbs to help prop up prices that have been hammered by the coronavirus crisis. However, in an attempt to have its cake and eat it too, the U.S. DOE said on Tuesday that U.S. output is already falling without government action, in line with the White House’s insistence that it would not intervene in the private markets….

… OPEC+ will require the United States to make cuts in order to come to an agreement: The EIA report today demonstrates that there are already projected cuts of 2 (million bpd), without any intervention from the federal government,” the U.S. Energy Department said.

That is not enough for OPEC+ however, and certainly not Russia, which on Wednesday made clear that market-driven declines in oil production shouldn’t be considered as cuts intended to stabilize the market, Kremlin spokesman Dmitry Peskov tells reporters on conference call.

“These are completely different cuts. You are comparing the overall demand drop with cuts to stabilize global markets. It’s like comparing length and width,” Peskov said…..Moscow’s participation is highly contingent on the US, and is unlikely to agree to output cuts if the US does not join the effort.” (“Historic Oil Deal On The Verge Of Collapse As Russia Balks At U.S. ‘Cuts'”, oilprice.com)

Putin is being reasonable and fair. If everyone else is forced to cut supply, then US oil producers should have to cut supply too. But they don’t want to share the pain, so they’ve settled on a strategy for weaseling out of it. They want their reductions in output (from weak demand during the pandemic) to count as “production cuts”. They even have a name for this swindle, they call it “organic production cuts”, which means no cuts at all. This is the way hucksters do business not responsible adults.

What does Putin want from this deal?

Price stability. Yes, he’d like to see prices settle somewhere north of $45 per barrel but that’s not going to happen for a while. The combination of a weaker demand (due to the coronavirus) and oversupply (from the Saudis flooding the market) have ensured that prices will remain low for the foreseeable future. Even so, Putin understood what the Saudis were doing by flooding the market, and he knew it wasn’t directed at Russia. The Saudis were trying to persuade US oil producers to stop freeloading and cut production like everyone else. That’s the long and short of it. Check out this excerpt from an article by oil expert, Simon Watkins at oilprice.com:

“Saudi Arabia was continually peeved …(because) its efforts to keep oil prices up through various OPEC and OPEC+ agreements were allowing these very shale producers to make a lot more money than the Saudis, relatively speaking. The reason for this was that U.S. shale producers…. were not bound in to the OPEC/OPEC+ production quotas so could fill the output gaps created by OPEC producers.” (“The Sad Truth About The OPEC+ Production Cut”, Simon Watkins, oilprice.com)

This is what the media fails to tell their readers, that US oil producers– who don’t participate in any collective effort to stabilize prices– have been exploiting OPEC production quotas in order to fatten the bottom line at the expense of others. US producers figured out how to game the system and make a bundle in the process. Is it any wonder why the Saudis were pissed?? Here’s more from the same article:

“This allowed the U.S. a rolling 3-4 million bpd advantage over Saudi in the oil exports game, meaning that it quickly became the world’s number one oil producer…. Hence, Saudi Arabia decided initially to unilaterally announce its intention for the last OPEC+ deal to be much bigger than that which it had pre-agreed with Russia, hoping to ambush the Russians into agreeing. Russia, however, turned around and told Saudi Arabia to figuratively go and reproduce with itself. MbS,… then decided to launch an all-out price war.” (oilprice.com)

So you can see that this really had nothing to do with Russian at all. The Crown Prince was simply frustrated at the way US oil producers were gaming the system, which is why he felt like he had to respond by flooding the market. The obvious target was the US shale oil industry that was taking advantage of the quotas, refusing to cooperate with fellow oil producers and generally freeloading off the existing quota system.

And what’s funny, is that as soon as the Saudis started putting the screws to the US fracking gang, they all scampered off to Washington en masse to beg for help from Papa Trump. Which is why Trump decided to make emergency calls to Moscow and Riyadh to see if he could hash out a deal.

It’s worth noting that domestic oil producers have been involved in other dodgy activities in the past. Check out this excerpt from an article in the Guardian in 2014, the last time oil prices crashed:

“After standing at well over $110 a barrel in the summer, the cost of crude has collapsed. Prices are down by a quarter in the past three months….

Think about how the Obama administration sees the state of the world. It wants Tehran to come to heel over its nuclear programme. It wants Vladimir Putin to back off in eastern Ukraine. But after recent experiences in Iraq and Afghanistan, the White House has no desire to put American boots on the ground. Instead, with the help of its Saudi ally, Washington is trying to drive down the oil price by flooding an already weak market with crude. As the Russians and the Iranians are heavily dependent on oil exports, the assumption is that they will become easier to deal with

The Saudis did something similar in the mid-1980s. Then, the geopolitical motivation for a move that sent the oil price to below $10 a barrel was to destabilize Saddam Hussein’s regime….

Washington’s willingness to play the oil card stems from the belief that domestic supplies of energy from fracking make it possible for the US to become the world’s biggest oil producer. In a speech last year, Tom Donilon, then Barack Obama’s national security adviser, said the US was now less vulnerable to global oil shocks. The cushion provided by shale oil and gas “affords us a stronger hand in pursuing and implementing our national security goals”. (“Stakes are high as US plays the oil card against Iran and Russia”, The Guardian)

This excerpt shows that Washington is more than willing to use the “oil card” if it helps to achieve its geopolitical objectives. Not surprisingly, good buddy, Saudi Arabia, has historically played a key role in helping to promote those goals. The current incident, however, is the exact opposite. The Saudis aren’t helping the US achieve its objectives, quite the contrary, they’re lashing out in frustration. They feel like they’re being squeezed by Washington (and US producers) and they want to prove that they have the means to fight back. Flooding the market was just MBS’s way of “letting off steam”.

Trump understands this, but he also understands who ultimately calls the shots, which is why he took the unusual step of explicitly warning the Saudis that they’d better shape up and step in line or there’d be hell to pay. Here’s a little background that will help to connect the dots:

“..the deal made in 1945 between the U.S. President Franklin D. Roosevelt and the Saudi King at the time, Abdulaziz, that has defined the relationship between the two countries ever since… the deal that was struck between the two men on board the U.S. Navy cruiser Quincy… was that the U.S. would receive all of the oil supplies it needed for as long as Saudi Arabia had oil in place, in return for which the U.S. would guarantee the security of the ruling House of Saud. The deal has altered slightly ever since the rise of the U.S. shale oil industry and Saudi Arabia’s attempt to destroy it from 2014 to 2016, in that the U.S. still guarantees the security of the House of Saud but it also expects Saudi Arabia not only to supply the U.S. with whatever oil it needs for as long as it can but also – and this is key to everything that has followed – it also allows the U.S. shale industry to continue to function and to grow.

As far as the U.S. is concerned, if t his means that the Saudis lose out to U.S. shale producers by keeping oil prices up but losing out on export opportunities to these U.S. firms then tough..

As U.S. President Donald Trump has made clear whenever he has sensed a lack of understanding on the part of Saudi Arabia for the huge benefit that the U.S. is doing the ruling family: “He [Saudi King Salman] would not last in power for two weeks without the backing of the U.S. military.” (“The Sad Truth About The OPEC+ Production Cut”, Simon Watkins, Oil Price)

Trump felt like he had to remind the Saudis how the system actually works: Washington gives the orders and the Saudi’s obey. Simple, right? In fact, the Crown Prince has already slashed oil production dramatically and is fully complying with Trump’s directives, because he knows if he doesn’t, he’s going to wind up like Saddam Hussein or Muammar Gaddafi.

Meanwhile, US shale oil producers won’t be required to make any cuts at all or, as the New York Times puts it: “It was not immediately clear if the Trump administration made a formal commitment to cut production in the United States.”

Got that? So everyone else cuts production, everyone else sees their revenues shrink, and everyone else pitches-in to put a floor under prices. Everyone except the “exceptional” American oil producers from the exceptional United States. They don’t have to do a damn thing.

 
• Category: Economics • Tags: Oil Industry, Russia, Saudi Arabia 
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  1. This author is either a blatant liar, or just out to lunch.

    • Agree: Lot
    • Replies: @McFly
  2. “Washington gives the orders and the Saudi’s obey. Simple, right? In fact, the Crown Prince has already slashed oil production dramatically and is fully complying with Trump’s directives, because he knows if he doesn’t, he’s going to wind up like Saddam Hussein or Muammar Gaddafi.”

    How does this make sense?

    “They feel like they’re being squeezed by Washington (and US producers) and they want to prove that they have the means to fight back. Flooding the market was just MBS’s way of “letting off steam”.”

    So SA decided to prove that they can fight back, but ultimately they backed down because they know they can’t fight back.

    Interesting topic, but the mechanism is entirely lost on me. Was it a symbolic gesture to shore up support in SA?

    Also, the Saudi monarchy is far more powerful than Gaddafi or Hussein. If Turkish intelligence reports (recently translated into English by the US government) are correct, they are in fact far more powerful than their cover suggests.

    • Replies: @meena
  3. A123 says:

    No one has a successful “plan” in this one. Multiple parties were involved, and everyone thought the other(s) were bluffing. Add to that, the consumption slowdown from the WUHAN-19 pandemic. It is fairly clear that all parties realize they wound up somewhere that none of them wanted to go.

    Now the question is, “Can the group as a whole back out of the standoff”?

    As long as WUHAN-19 is suppressing demand, an effective response seems unlikely. The necessary cuts are too deep to announce publicly. Worse yet, even if agreed, they are likely to be unenforceable. Cheating will almost certainly collapse any effort while consumption is impaired.

    PEACE 😷

    • Replies: @mijj
  4. mijj says:
    @A123

    WUHAN-19 .. ?

    oh . you mean the USBioVirus that targetted Wuhan!

  5. You see, US oil producers are not what-you’d-call “team players”…

    Got that? So everyone else cuts production, everyone else sees their revenues shrink, and everyone else pitches-in to put a floor under prices. Everyone except the “exceptional” American oil producers from the exceptional United States. They don’t have to do a damn thing.

    The only reason US producers might be able to sustain output below $45 per barrel is because selling any product below that price beats selling no product at all. Cutting production while still receiving a below “breakeven” price is still a losing move. The only reason most US producers can break even at $45 per barrel is that many of them are holding assets they received after bankruptcy and reorganisations of ventures that had a lot more money flushed through them. Actual breakeven for the US would be over $100 if a number of investors hadn’t already been fleeced by the industry. As it is, the industry is deep in hock and needs to maximise revenue to service their debt.

    Even if the oil war” is a fake, it would be foolish for those parties to think they can get any coöperation from US producers, and instead would continue to make them sell into a far lower-priced world oil market until they fail or until the US internalises all oil supply and demand, which is nigh near impossible because the US can’t refine much of what it produces.

    If Vlad was half the enemy the US says he is, he would be smiling and pumping away rather than talking to the Saudis, because while the Saudis can lift oil at a cost far lower than the Russians, the Saudi government’s budget is far more dependent on oil, and is in serious jeopardy at prices below $85. Russia can still produce in the twenties and teens and do just fine.

    • Replies: @JamesD
    , @Manqueman
  6. Miro23 says:

    “..the deal made in 1945 between the U.S. President Franklin D. Roosevelt and the Saudi King at the time, Abdulaziz, that has defined the relationship between the two countries ever since… the deal that was struck between the two men on board the U.S. Navy cruiser Quincy… was that the U.S. would receive all of the oil supplies it needed for as long as Saudi Arabia had oil in place, in return for which the U.S. would guarantee the security of the ruling House of Saud.

    OK, but quite a lot has changed since 1945.

    – Russia is now a major oil exporter that can influence the world price and doesn’t necessarily cooperate with Saudi Arabia. They would like to get away from the dollar as the world’s reserve currency.

    – China is now a major oil importer. They take 12% of Saudi oil (33% inc. Japan and Korea) vs. only 8% by the US. They would also like to get away from the dollar as the world’s reserve currency.

    – After Saudi Arabia and Russia, Iraq is the world’s third largest oil producer and the Iraq parliament has just demanded that the US close its bases and get out of the country. The US refused = an unstable Iraq oil/US dollar link.

    – Saudi Arabia made the 1945 agreement with Anglo America, whereas the present US is run by Zionists with an outsized Israeli influence. The Saudi leadership are now identified with Israeli interests. These are hostile to Arabs in general, having destroyed Iraq, Libya and much of Syria = the isolation of the Al-Sauds in the Arab world.

    – The US now supplies a large amount of relatively high cost shale oil, altering the world demand/supply balance. Not at present profitable, but if the dollar loses its reserve role, then shale oil would be vital for US supply. Imported (Saudi) oil would become prohibitively expensive (along with everything else currently sold in Walmart). For example, after the Pound Sterling lost its reserve status it fell from £1 = 4.70 USD (1915) to £1 = 1.25 USD today.

    Basically, the Roosevelt – Abdulaziz deal is under a lot more strain now than it was in 1945 and the US has nothing like the dominant world position that it once had – despite anything that Trump says.

    • Agree: Ilya G Poimandres
  7. JamesD says:

    Competition is beautiful. I’m loving the $1.30/gallon price. Keep competing for my business boys.

  8. JamesD says:
    @The Alarmist

    Calculating a “break even price” is a fools errand, unless you make assumptions that the price for oil leases is fixed and the price for labor is fixed.

    Refining our own crude is not “near impossible”, unless you are talking immediate term. As it is, it is more economical for the U.S. to export high quality light crude oil and import hi sulfur heavy oil from Canada and Mexico, because it is cheaper and a lot of our refineries can handle it. This strategy is optimum. But if economics change, refineries will invest money in relatively low tech fixes to run the lighter crude.

  9. Tulip says:

    Gee, if only American oil producers would collude with foreign governments to engage in price fixing to manipulate prices in international energy markets. . . I don’t see how there could be any reasonable objection to that course of conduct.

    • Agree: Sincerity.net
    • Replies: @Herald
    , @McFly
  10. SteveK9 says:

    That’s all been pretty obvious, even for a non-expert. In the end this isn’t going to work. Russia should try to engineer a cost of around $45. Even that is low enough to destroy shale oil. It will take a long time, because the banks control the government and know they will be bailed out when the loans to the industry default. In the longer run, the only way to keep a shale industry is tariffs on imported oil. Trump has mentioned that already, and it is clearly coming down the road. Is that good or bad for the US? It’s hard to say. Economically bad, but strategically sound? In any case in the even longer term, shale will die, it’s just too expensive, and the ‘sweet spots’ are disappearing. Technological improvements can only do so much.

    There is a way for the US to achieve energy independence … uranium. But, it’s not clear how long it will take to come to that realization.

    • Replies: @A123
  11. Anonymous[658] • Disclaimer says:

    “Saudi Arabia was continually peeved …(because) its efforts to keep oil prices up through various OPEC and OPEC+ agreements were allowing these very shale producers to make a lot more money than the Saudis, relatively speaking. The reason for this was that U.S. shale producers…. were not bound in to the OPEC/OPEC+ production quotas so could fill the output gaps created by OPEC producers.”

    True. These graphs show the whole story.

    • Thanks: Miro23
  12. A123 says:
    @SteveK9

    There is a way for the US to achieve energy independence … uranium. But, it’s not clear how long it will take to come to that realization.

    Thorium is a much better option than Uranium.

    http://lftrnow.com

    – It is found in large quantities in “Rare Earth” mines, which are rare in the US because they dig up Thorium. Thorium is (weakly) radioactive, and US law requires it be treated as a radioactive waste and buried. Too much Thorium in a rare earth mine makes it unprofitable, but it is these rare earth mines that bring up the high technology metals we need in society today, such as Neodymium for magnets (think generators and motors).

    – A [Uranium] LWR (Light Water Reactor) in the US burns about 0.5%-5% of the fuel put in it, the remaining is disposed of as unburned fuel as part of the radioactive waste. A LFTR on the other hand, running from Thorium could burn 100% of the fuel

    LFTR should have been pursued decades ago. The Cold War drove the selection to the Uranium & Plutonium cycle. However, that is the wrong choice for civilian electricity.

    PEACE 😷

    • Agree: Redneck farmer
    • Replies: @Derer
  13. Alfred says:

    Clearly, the present situation suggests that if the economies of the world don’t pick up from where they left off, which they won’t, we are well past peak oil. We are going to go down fast on this escalator. No matter how cheap the oil appears to be, we still won’t be able to afford it.

    Canadian Oil Sands Per Barrel At $4.47, Now Cheaper Than 12-Pack Coke, $5.08

  14. US shale operations have almost never been profitable anyway. The only reason they’re still around is because they’re subsidized by the US (via low-interest Fed funny-money financing) in order to undermine Russia and Iran. But this is eventually going to hurt KSA as well; so the question remains as to how long the Saudis put up with this. I’m sure Russia and China wouldn’t mind seeing them switch sides … even though it’d be a huge personal risk for Mohammed bone-Sawman.

    • Replies: @A123
  15. Herald says:
    @Tulip

    Gee, if only American oil producers would collude with foreign governments to engage in price fixing to manipulate prices in international energy markets. . . I don’t see how there could be any reasonable objection to that course of conduct.

    But cuts in production are being sought by US oil companies, though of course they would only apply for others. Nevertheless, all very fair and reasonable.

  16. anon[317] • Disclaimer says:

    Marlon Brando, playing Adam Steiffel, Chairman of a fictitious Big Oil corporation in The Formula:

    Ah, Arthur, you’re missing the point: We are the Arabs.

  17. A123 says:
    @Digital Samizdat

    US shale operations have almost never been profitable anyway.

    Most U.S. Shale operations have been profitable. Badly over leveraged companies tend to die even with a high quality underlying business opportunity.

    Look at the chart up and in #11. With highest possible labor cost and highest possible equipment rental fees, break-even ~$40/bbl were common. With skilled labor and equipment available at a much lower expense rate, break-even is now ~$30/bbl.

    At $20/bbl WTI, a great deal of production will *temporarily* be shut. However, it will come back online again once prices go up enough to support it. There is nothing OPEC can do in the markets to permanently cripple highly cost effective U.S. Shale Oil extraction.

    PEACE 😷

  18. Jimmy1969 says:

    Oil producers have a lot of power with the US Congress.

  19. meena says:

    in line with the White House’s insistence that it would not intervene in the private markets….”

    That a lie American love s to hear after the Sunday service is over .

  20. meena says:
    @jbwilson24

    So SA decided to prove that they can fight back, but ultimately they backed down because they know they can’t fight back.”

    This is not the first time when Saudi has backed down. Saudis did not want 1991 invasion of Iraq . They did not want 2003 Iraq war.
    They did not want Arafat to be dispatched with US ’s green lighting it . For years they did not want type of solution that has been imposed slowly inexorably by US . But they have gone along with all of those . They were genuinely aghast at the wars against Gaza and blockade of Gaza by Israel. Recent killing of Souleimnai is another example where a possibility of Saudi – Iran thawing/ detente was incinerated by US drones .

    US is fully on board when Saudis kill their own people or other muslims or get into western bed on some terror activities against Latin or central America. All other foreign activities are forbidden .

  21. 1) Does the US not have cartel laws against price fixing? That might be one reason for not colluding with Saudis.

    2) The Saudis have many advantages:
    a) a HUGE profit margin
    b) keeping their oil in the soil is a better savings account than buying US treasury bills.

  22. Derer says:

    Not long ago the sinister players in Washington were bragging the US is number 1 oil producer in the world?? and now they do not want to participate in the production cut. Ooh those self destructive Yankees.

  23. Derer says:
    @A123

    Now we know where Thorium is in abundance it must in Kosovo.

  24. Manqueman says:
    @The Alarmist

    Query: Besides a hostility to OPEC, maybe the problem with the US is that the shale industry rests on a huge amount of debt and needs cash coming in, no matter the price, to service the debt to stay in business. (POTUS, for one of many, can explain.) The financialization of businesses has truly worked wonders and helped make the economy so much better for a few people. (Don’t worry; that isn’t going to change any time soon.) I’d hazard a guess that Saudi Arabia and Russia, at least in the area of oil, still have businesses, not de facto financial instruments like we do.

    • Agree: The Alarmist
  25. McFly says:
    @TrumpLover

    Yes, the level of ignorance on display in this one is truly spectacular.

    This guy wants our elected leaders to torture ordinary Americans by joining in a cartel run by Saudi and Russian thugs?

  26. McFly says:
    @Tulip

    With the caveat that this is bad for American oil companies, who treat workers better than many corporate sectors, the price collapse is a net positive for the economy and national security.

    U.S. politicians will be less likely to start pointless wars in Middle Eastern wastelands that kill countless American young people with zero benefit to ordinary people, misallocating trillions of dollars that would have been better spent on education and health care

    Even better if this toppled the extraordinarily corrupt Saudi regime– that would truly be a day to celebrate.

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