Why oil price wars are not sustainable

Ideas & Debate

Why oil price wars are not sustainable

We should enjoy the lower prices as long as
We should enjoy the lower prices as long as they last. FILE PHOTO NMG 

Earlier this month, Saudi Arabia increased oil production while also discounting its export oil prices. Brent oil price instantly dropped from about $50 to a low of $33 per barrel. The Saudis were retaliating against Russia for its failure to support an Opec decision to decrease oil production by a shared total of 1.5 million barrels per day (mbpd) meant to protect prices from reduced global oil demands caused by coronavirus impacts.

On the face it, it looks like a supremacy showdown between Saudi Arabia and Russia, but in the background is US. The three are the top world oil producers with US, Saudi Arabia and Russia producing 15.0, 12.0 and 10.8 mbpd respectively in 2019. But US is a late comer to the top position mainly due to a significant increase in its shale oil production over the last five years, making US a formidable competitor for oil export market shares against the other two countries.

It was this incremental increase in US shale oil which in 2014/15 had caused the price collapse to as low as $25. And it was these low prices those three years ago that prompted Opec to invite Russia to co-operate in production cuts to strengthen prices, and as a result prices recovered to above $60, which in turn encouraged even more investments in US shale oil, making Opec/Russia to lose out in export markets shares, while US continued to gain.

With the latest demands destruction by coronavirus, Opec decided on a further production reduction of up to 1.5 mbpd. But President Vladimir Putin, perhaps the most astute leader of modern times, saw it differently and refused to comply. For Russia, it was probably the right opportunity to let prices freely collapse and cripple US oil and gas shale oil producers.

Putin appears determined to suffer low oil prices for as long it takes, and square it with the US shale gas producers whose LNG (liquefied natural gas) exports in Europe are competing with Russian piped natural gas. The American LNG exports started after 2015 to fill a gap caused by pipeline restrictions prompted by the Russian/Ukrainian conflict over Crimea.


To complicate the situation, US President Trump has recently sanctioned any financier or contractor who dares participate in the construction of an alternative Nord Stream pipeline between Russia and Germany meant to by-pass Ukraine. President Trump sees the project as spoiling US emerging opportunities for natural gas markets in Europe.

President Putin has every economic and political motivation to seize the latest opportunity and keep oil prices low to undermine US shale gas economic viability and exports into Europe. And at oil prices below $40, many US shale oil and gas ventures are already heading for bankruptcies, with President Trump considering bailouts which may prove difficult politics in an election year.

Oil production economics are a function of both unit production costs, and resilience by producing nations to fund their national budgets. Saudis have the lowest production costs, followed by Russia, with the US shale production being the most expensive. In respect of capacity to finance national budgets, the Saudis need oil prices of around $82 while the Russians budgets can survive at $42.

It is therefore improbable that the Saudis, Russians, Americans and indeed all the other Opec producers can sustain low oil prices for long. But the face-saving escape may come from very unlikely quarters- President Trump placing a diplomatic telephone call on Saudi Crown Prince, Mohamed Bin Salman (MBS) to persuade him to forgo his belligerent oil production and pricing policies. Chances are high that MBS will oblige, and this will save the Saudis from what is seen as unnecessary self-destruction…

With the unknown extent of coronavirus duration and extent of resultant global economic havoc, it is to the interests of all to maintain the oil markets at sustainable oil prices.

In Kenya, we should enjoy the lower prices as long as they last; to at least moderate the anticipated impacts of the virus. On the other side, at such low prices, no investor in Turkana oil will be expected to be in a hurry to make a final investment decision.

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