By Kim Iskyan
flying and shaking hands (thanks, COVID-19) meant less demand for oil. More supply and less demand means a (much) lower price. But wall-to-wall COVID-19 news is making us look away from what might be – in economic, market, and geopolitical terms – the much bigger story of an oil-price crash... Here in America, as Donald Trump famously – and correctly – pointed out back in November 2018, a lower oil price is like a tax cut. You pay less to drive your Jeep Grand Cherokee Trackhawk (13 miles per gallon). But there’s another side to it, too. Thanks to higher production of shale oil, the U.S. produced twice as much oil in 2018 compared to 2011 – and more than either Russia or Saudi Arabia. The problem with shale oil is that it’s expensive to get out of the ground... And at a lower oil price, a lot more shale oil producers will be gushing even more red ink than they already were. That’s bad news for the people who work for those companies... the banks that lent money to shale oil producers... investors in those banks and companies... and the economies of the cities and states where shale oil producers are an important source of jobs and tax revenue. Saudi Arabia, in turn, is happy to show Russia who’s boss... and put those pesky American shale oil producers out to pasture. But it comes at a steep cost, since Saudi Arabia is now making a lot less money from its main resource.
As of last week, a barrel of one of the essential inputs of modern civilization costs less than half of what you’d pay for a same-sized fix of Coca-Cola Cherry Zero. As political risk media company GZERO Media explained earlier this week... For three years, Russia and Saudi Arabia, the world’s two largest oil exporters, had a deal to prop up global crude prices by limiting production. They calculated that by producing fewer barrels, rising prices would make each barrel worth more. Over the weekend, that deal collapsed when Russia backed out, allegedly because it decided that higher prices were also providing an unexpectedly large boost for the U.S. oil industry, which has expanded its market share by increasing production by nearly 50% since the Russia-Saudi (formally, Russia-OPEC) deal began in late 2016. A lot of that increase has come from U.S. shale oil. Saudi Arabia, eager to show Russia that its market power is not to be ignored, slashed the price at which it sells its own oil and moved to sharply boost production. The expected flood of new Saudi supply dropped global oil prices by more than 30% on Monday, the biggest overnight drop in almost three decades. The price of oil was already under pressure because closed factories, crippled supply chains, and people FaceTiming instead of
American Consequences
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