DISPATCHES FROM MOON OF ALABAMA, BY "B"
This article is part of an ongoing series of dispatches from Moon of Alabama
[dropcap]T[/dropcap]oday there is a meeting by video of the OPEC states and Russia. Tomorrow the energy ministers of all G-20 states will likewise meet. Their discussions will be about the sinking global oil price caused by a lack of demand due to the novel coronavirus pandemic and record oil output from Saudi Arabia and Russia. 'Western' media have been optimistic that an agreement will be found:
The Organization of the Petroleum Exporting Countries and other producers including Russia, a group known as OPEC+, are expected to discuss record cuts equivalent to 10% to 15% of global supplies, although demand has plunged by up to 30%.
It is unlikely that OPEC will agree on any cut unless the U.S. and other large producers join the deal. The U.S. is, for now, unlikely to do that.
Until the end of the last OPEC+ agreement this month and the onset of the pandemic demand slump, the three top producers were the U.S. with 12.7 million barrels per day, Russia with 10.9 mbpd and Saudi Arabia with 9.8 mbpd.
Since 2016 OPEC and Russia had reduced their production to keep the oil price in the $60/b range. This effectively subsidized the U.S. shale industry. U.S. production kept growing while production by Russia and Saudi Arabia was artificially limited. It allowed the U.S. to grab more global market share at profitable prices.
![](https://www.moonofalabama.org/images10/uscrude-s.jpg)
Source: Macrotrends - bigger
When the pandemic arrived Saudi Arabia urged Russia to agree to further production cuts. But that would have kept the price of oil high enough for the U.S. shale industry to grow at additional costs for Saudi and Russian production. Russia was not willing to allow that.
Now, as the prices have dropped to $20 per barrel U.S. shale oil is no longer profitable and the shale companies are on the verge of going bankrupt. That is clearly one outcome that Russia would like:
As soon as U.S. shale leaves the market, prices will rebound and could reach $60 a barrel, Rosneft’s Igor Sechin said recently. As fate would have it, in what many would have until recently considered an impossible scenario, a lot of U.S. shale might do just that.
Breakeven prices for U.S. shale basins range between $39 and $48 a barrel, according to data compiled by Reuters. Meanwhile, West Texas Intermediate (WTI) is trading below $25 a barrel and has been for over a week now.
But Russia also offered an alternative:
A new OPEC+ deal to balance oil markets might be possible if other countries join in, Kirill Dmitriev, head of Russia’s sovereign wealth fund said, adding that countries should also cooperate to cushion the economic fallout from coronavirus.
...
“Joint actions by countries are needed to restore the (global) economy... They (joint actions) are also possible in OPEC+ deal’s framework,” Dmitriev, head of the Russian Direct Investment Fund (RDIF), told Reuters in a phone interview.
That was an invitation to the U.S. to join a OPEC++ deal and to commit itself to production limits.
We discussed why the U.S. was unlikely to do that. Joining a cartel does not fit its neoliberal mindset:
“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,” said [Randolph Bell, director of the Global Energy Center at the Atlantic Council].
Trump made a small counteroffer when he said that the U.S. oil output has already been reduced by 1.2 million barrels and that this was a sufficient U.S. contribution to limiting outputs:
“Nobody’s asked me, so if they ask I’ll make a decision,” Trump said on whether the U.S. would participate in cutbacks. U.S. producers are “already cutting back and they’re cutting back very seriously. I think it’s happening automatically.”
But for Russia that is hardly enough:
Russia does not consider a supply reduction driven by falling demand or lower prices to be a real output cut within the parameters of the proposed OPEC+ deal, the Kremlin said on Wednesday. It was the first statement from Moscow about this crucial aspect of the talks and indicated that President Vladimir Putin may be expecting a more significant contribution from the U.S. than his counterpart Donald Trump is willing to give.
“You are comparing the overall demand drop with cuts aimed at stabilizing the global market,” Kremlin spokesman Dmitry Peskov told reporters at his daily conference call, when asked if Russia would accept U.S. production cuts driven only by market forces. “These are completely different things.”
Washington has so far offered what officials described as “automatic” and “market-driven” cuts, which are expected to happen as companies from Exxon Mobil Corp. to independent shale explorers slash spending in response to low prices.
If the U.S. insist that "automatic" and "market drive" cuts are all it will contribute then its shale oil industry will have to die.
A new OPEC++ deal will require hard production cuts and limits that the government of the U.S. will have to guarantee for several years. A few additional good will gestures towards Russia will likely also be required.
But the Trump administration is adverse to binding international agreements. Its officials instead play their usual game of issuing empty threats:
Republican U.S. senators who have introduced a bill that would remove U.S. defense systems and troops in Saudi Arabia unless it cuts oil output will hold a call with the kingdom’s officials on Saturday, a source familiar with the planning said on Tuesday.
Writing nasty letters which demand that Saudi Arabia carries the burden of the unprecedented demand slump are useless in this situation. The normal global demand is 100 mbpd. It has now fallen to nearly 70 mbpd and is unlikely to revive during the next 18 month. Even if Saudi Arabia would end all of its production the markets would still be oversupplied. It would also destabilize the country which depends on the sale of its oil for 70% of its budget.
If the U.S. insists that the Saudis cut their production to save its shale oil producers the Saudis might break the old deal that makes the U.S. dollar the leading currency of the globe. If they decouple their currency from the U.S. dollar and demand payments in Euros, Yen or Yuan the U.S. dollar is toast.
The threats will not help at all. They only make Saudi Arabia more determined to go its own way.
Some people in the U.S. oil industry have caught up with the new reality:
Some old-guard Texas oil drillers are urging state regulators to clamp down on crude production to halt a price collapse more severe than any of them have ever lived through.
The largest U.S. oil-producing state hasn’t restricted crude production in almost 50 years but a growing chorus of explorers and related industries are advocating just such a move. The Texas Railroad Commission that has overseen the state’s industry for more than a century is scheduled to discuss so-called pro-rationing on April 14.
...
Kirk Edwards, an industry veteran and chief executive officer of Latigo Petroleum LLC, estimates that within a month the oversupply will be so massive that Permian Basin drillers will no longer be able to send crude to refineries in the Houston area and Louisiana.“Until two weeks ago, I was 100% against the use of proration in Texas to remedy these kinds of problems,” Edwards said in a letter to the agency. The commission and the Trump administration need to “step up to the plate and save Texas and the American energy industry right now, before it is too late.”
But the big industry players do not want a cut for everyone:
The appeals for supply caps highlights a growing schism between small, independent explorers and international behemoths like Exxon Mobil Corp. that oppose government intervention. In neighboring Oklahoma, oil-industry trade groups are at loggerheads over whether state regulators should step in.
The calculation for big and rich companies is different. They hope that the small producers will go bankrupt so that they can buy their already developed oil fields at record low prices. The would keep those shut down but would reopen them when prices are back to higher level.
Exxon is likely to have more political clout than the small producers who now fear for their companies.
Today's OPEC+ talks are ongoing and they seem to prepare an offer that will then be proposed at tomorrow's G-20 meeting. The U.S., Canada, Brazil, Norway and others would then have to commit to make proportionally similar cuts.
But how big is the chance for that to happen?
Posted by b on April 9, 2020 at 18:25 UTC | Permalink
re: Congress posturing to put pressure on Saudi Arabia
Much of the Saudi budget is recycled back into the US to buy military equipment and services... That industry is one of the very few that has as much influence on Congress than the oil/gas industry. The more likely "solution" is that they will receive a bailout.
Posted by: ptb | Apr 9 2020 19:28 utc | 2
US Shale Oil is a Ponzi Scheme that's only survived because of essentially free credit and most damning is it takes more energy to extract than it provides. The bonds issued by its companies are correctly regarded as Junk. If it were an actual profit making enterprise, its bonds would be A or better. The bond ratings have always told the truth about shale oil. Part of the massive bailout is to cushion the fall when all those bonds are defaulted. Shales actual affect on global market was to lessen the amount of US imports that when combined with domestic demand destruction lowered overall price. The key for the US oil market is its refinery capacity (Large PDF). Here's the latest from Bloomberg. Gasoline demand is down 50% Y/Y! and refiners are only now beginning to adjust. And when refiners don't refine, they don't make any money, and many were already on extremely tight margins causing them to delay the ongoing maintenance their facilities demand lest they blow up like the one in Philadelphia last year--it's now closed permanently.
There's going to be lots of blood spilt in the oil patch as the year goes forward, and the Ponzi Scheme will be exposed for what it really was--a very expensive jobs program.
@ptb #2
If the oil fracking industry is producing 6 million barrels per day and prices are $20+ below production costs, then the cost to subsidize the industry is $120 million dollars per day. 6 months of this subsidy will be $22 billion.
The subsidy would likely need to run at least a year, more like 2 or 3.
Is Trump willing to divert a mere $90 billion from the stimulus bills to the oil fracking industry?
Posted by: c1ue | Apr 9 2020 19:49 utc | 4
The calculation for big and rich companies is different. They hope that the small producers will go bankrupt so that they can buy their already developed oil fields at record low prices. The would keep those shut down but would reopen them when prices are back to higher level.
Indeed, that's also what I'm observing. The exploitative reforms post-2008 didn't work: the gig economy extracted some surplus value from the working class, but the space for a new cycle of accumulation revealed to be too small.
Now, with the COVID-19, the great bourgeoisie (big business) realized they can find more space for expansion by destroying small and medium businesses at the First World and at the "developing economies".
To be fair, the petit bourgeoisie was already at a "zombie state" (i.e. zero profit, zero growth) in the First World since the 2008 meltdown. They are indeed parasites of the system, and destroying them will indeed open new vital space for the expansion of capitalism (in the form of big business). However, my take is this margin will also be small: the petit bourgeoisie was mostly in capilary small scale businesses with naturally low productivity rates, mostly local restaurants, barber shops, small groceries and other stores, extremely capilarized self-employed services (plumbers, electricians, prostitutes, therapists etc. etc.). Those sectors give big business little space for automation, being more like a Uber scenario (i.e. deepening exploitation of labor). It won't save the system.
Capitalism is now, literally, devouring itself. Take pictures now, because that's a rare scene.
--//
Brazilian oil stock suddenly fell today (just one hour ago) - wiping out all its gains of two days. The OPEC++ deal will most likely fail.
--//
With the threat of the pandemic over, China is already attacking the USA and Western Europe on the financial sector, is prepared to eat up their market shares:
China eyes more market-oriented economy to spur growth
When Xi Jinping unified power in China in 2012, the country already was the industrial superpower. His "reform and opening up" doctrine's ultimate aim is to also make China a financial superpower. This is a necessary evil, as only being the industrial superpower makes you susceptible to outside strangling thanks to the control of the flux of money-capital from the financial superpower (the USA). Also, it supress the welfare of the people of the industrial superpower, since it needs to keep reclycling its money reserves in treasury debt papers of the financial superpower, creating the unjust scenario where the people of former keeps producing much more than it consumes, while the people of the latter keeps consuming much more than it produces.
Xi Jinping wants to end this circus. He wants China to unify the championship belts.
This "reform and opening up" is all about China rise to financial superpower status. If it fails, Xi will enter History as the Chinese Nikita Krushchev. It's all in for his project.
@ c1ue
Why would he budge? Right now someone has to go bankrupt in the oil budiness because of overproduction and because many countries actually make an effort with renewables mid to long term. So he might ask his advisors why it should be American companies which have to go bankrupt. They will tell him something rational like the increased costs of production in the US and he won't care. It's a weak move, especially until after the elections.
Posted by: Del | Apr 9 2020 19:57 utc | 6
survival of the fittest, except when russia and ksa are the fittest, lol... i thought russia was just a gas station?? fracking is expensive.. those who frack are going to lose out here...i would love to see ksa go off the us$, but i think they are smart enough to know that will be the end of ksa too.. i am curious to see what comes out of the talk today.. as @1 red ryder notes - putin/russia is in the drivers seat - again.... no wonder capitalism wanted open access to russia back in the early 90's and the dream of yukos oil got lost in the shuffle to where we are now..
Posted by: james | Apr 9 2020 20:11 utc | 7
OFF TOPIC
Has enyone spotted! There is a big argument going on !
At off guardian Twitter account attacking MOA. RIGHT NOW !!
Off Gardian full on denial based on truth deprivation syndrome ! It’s getting ugly !
Posted by: Mark2 | Apr 9 2020 20:23 utc | 8
To borrow a phrase from Mad John McCain, America is a (shale) gas station masquerading as a nation.
Posted by: ak74 | Apr 9 2020 20:24 utc | 9
Trump is not deal capable in this case. He cannot agree to regulate production because he is surrounded by ideologues that detest government and any form of self regulation. They will rather die off in a battle of attrition than yield to regulation.
Market crash on immense scale is likely over the next few days. No bears, no bulls, just ignorant pigs.
Posted by: uncle tungsten | Apr 9 2020 20:29 utc | 10
hmmm... does that mean that the longer we accept house arrest the better chance we have to see the fall of the houses of the US and KSA in our lifetime?
i would start to look at it positively!
Posted by: Mina | Apr 9 2020 20:31 utc | 11
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"b" is Moon of Alabama's founding (and chief) editor. This site's purpose is to discuss politics, economics, philosophy and blogger Billmon's Whiskey Bar writings. Moon Of Alabama was opened as an independent, open forum for members of the Whiskey Bar community. Bernhard )"b") started and still runs the site. Once in a while you will also find posts and art from regular commentators. You can reach the current administrator of this site by emailing Bernhard at MoonofA@aol.com.
This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.
So typical of Putin that his timing and strategy are always "no choice but you sign the document".
This is like the Debaltsevo Cauldron. The Ukies and NATO troops are surrounded. Germany and France had to beg to save the NATO troops, while the Ukies were left to be slaughtered. Then they all signed the Minsk 2 Accords, without Russia signing anything.
Then, Putin took the Accords to the UNSC for its backing. That left the Ukies no way out of Minsk 2. It has choked them ever since.
Right now, U.S. shale will live or die based on what Putin wants. Trump can refuse. But then Trump kills shale, not Putin.
Everyone can have a $45-60 industry, but if not, then the US goes back to very little shale, no Energy Independence, and when they are busted and shuttered, the price will go to $60 like Igor Sechin (Rosneft) predicted.
Posted by: Red Ryder | Apr 9 2020 18:45 utc | 1