Russia will cope with a drop in oil prices: What about the US?

US, WASHINGTON (ORDO NEWS) — In late 2019 – early 2020, the price per barrel of oil was approximately $ 60-70, depending on the grade. All spring she was falling rapidly. On April 1, oil was already worth about $ 25. This Monday, the price of the American WTI grade collapsed. Suddenly this oil depreciated to zero. The buyer could even get a couple of dollars for the trouble.

One reason for the fall in prices is, of course, covid-19. In February, factories closed in China. Then the same thing happened in Europe and the USA. Cars no longer leave the parking lot, aircraft remain on the ground. Demand for oil fell sharply.

The conflict between Saudi Arabia and Russia also contributed to the cheapening of oil. Despite falling demand, they refused to cut back on production. This is a struggle with economic and political logic.

In the 1990s, a barrel of oil on average cost about $ 20. Everything changed in the new millennium, when the development of China pushed the world economy: it required a lot of energy. In 2010, the price exceeded $ 100 per barrel. Thanks to this, oil production, which used to be too expensive, suddenly became cost-effective. Investing in American shale oil has made the United States one of the largest producers.

As a result, global oil supply has increased dramatically. The market could not bear it. To keep the price high, the Saudis, who have the most oil and whose production is the cheapest, needed to produce less. But they did the opposite, trying to withdraw from the game competitors who have lower oil profitability. In 2014, the price began to fall sharply.

Because of the coronavirus, we are now seeing something similar – but this time the shock is due to a decrease in demand, and not an increase in supply. To maintain a stable price level, production needs to be reduced.

But this time, the Saudis were not ready to deny themselves anything for the sake of others. In Moscow, whose oil is also quite cost-effective, Vladimir Putin saw what was happening a chance to strike at the American oil industry, which is most dependent on prices. Both Russia and Saudi Arabia continued to pump oil.

When they finally came to an agreement about a week ago under the strong pressure of President Trump, it turned out that it was too late. The price has already fallen by more than half.

The impressive drop in WTI US oil on Monday (and its international Brent alternative, meanwhile, still costs around $ 20), however, is more likely to be related to logistics than to politics and economics. In the US warehouses, the place is gradually running out, and in the near future there will be no opportunity to transport somewhere everything that is mined.

The decline in oil prices is considered good news. Consumers-motorists benefit from cheap fuel. Industry can provide big returns to shareholders. The economy is getting a boost. But this time it will hardly be so. The virus destroyed all demand.

Oil-dependent countries will have a hard time. There is no reason to shed tears over the fate of Vladimir Putin in Moscow and Muhammad bin Salman in Riyadh. But the risk is great that they will cope with this situation better than anyone else. They are well prepared and can hope in the future that prices will rise, as most of the American production will be taken out of the game. More vulnerable are small, poor countries in Africa, Asia, and Latin America.

Most importantly, what will happen in the USA. Throughout the spring, there were reports that many enterprises producing shale oil were on the edge of the abyss. Profitability is small, debts are large.

Of course, thorough rationalization will not hurt. In the long run, measures designed to slow down climate change will nevertheless make many industries too expensive.

At the same time, the US economy is now very fragile. The oil industry is not isolated from everything else. Bankruptcy of companies will affect the labor market, as well as the banking sector and factory production.

If a barrel of oil caught fire, wait for the big bang.

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