Saudi Arabia, Russia and other oil producers struck a deal two years ago to boost oil prices by cutting production. At the time, I questioned how long this new group, calling itself OPEC+, could connive without some party cheating or rewriting the deal.
Meanwhile, American oil executives, those conservative paragons of capitalism, hypocritically cheered the price-fixing scheme. After all, they know they can’t compete in a truly free market, where oil flows without someone, somewhere manipulating the market.
What OPEC+ gives, though, OPEC+ can take away.
Dozens of times over the past two years, energy consulting firms have confidently predicted oil prices would skyrocket and generate enormous profits for investors. They assumed OPEC+ was going to subsidize Texas shale drillers, who cannot turn a profit for less than $55 a barrel.
I repeatedly warned world had too much supply. Why would Saudi Arabia and Russia allow U.S. oil companies to leech market share? OPEC+ has 2 million barrels a day of spare capacity, most of it cheaper to produce than West Texas Intermediate.
The deal lasted longer than I expected and fell apart last week.
For the first time in two years, we have a free mar ket in crude, and the price is about $35 a barrel. In a note released Monday, Bank of America expects the price to remain below $50 for the rest of the year
Big Oil’s cries of betrayal would be hilarious if they were not so cynical. The American Petroleum Institute, the industry’s lobbying arm, sent an email to journalists calling the price drop “Putin’s War on America’s Shale Oil Industry.”
“Russia has a history of using energy policy to advance geopolitical goals,” advises Scott Parker, an API spokesman. “Ultimately, it’s helpful to remind readers that this may be a foreign policy decision by Russia to reclaim its geopolitical leverage and undermine a key U.S. strategic asset.”
Who cares if the policy decision creates a competitive market where consumers pay only the marginal cost for petroleum instead of a rigged price that benefits oligarchs and dictators? I guess nothing sets Big Oil’s hair on fire like a 50 percent drop.
President Donald Trump called Saudi Crown Prince Mohammad bin Salman on Monday, presumably to get him to resume price-fixing. The Trump administration’s chest-pounding is pitiful.
“These attempts by state actors to manipulate and shock oil markets reinforce the importance of the role of the United States as a reliable energy supplier to partners and allies around the world,” Energy Department spokeswoman Shaylyn Hynes said in a statement.
OPEC and Russia are not manipulating the market; they just stopped colluding. Not long ago, Republicans in Congress were promoting an antitrust law to make OPEC’s quota-setting punishable in U.S. courts. Now they want OPEC to rig the game and force American consumers to pay more?
A few years ago, American oil executives bragged that shale oil companies were the new swing producers, ready to raise or lower production depending on global demand. They claimed they would make OPEC irrelevant because they would guarantee energy independence.
The oil and stock market’s behavior over the last 10 days proves that energy independence is a fairy tale told by nationalists who do not understand how markets work.
Refineries require a blend of different crude oils from around the world to make the products we use in our daily lives. We both export and import oil to supply refineries in the Houston Ship Channel.
Wholesalers sell their gasoline and diesel based on the international price of crude. Cheap oil in Texas doesn’t mean cheap gasoline, but cheap Saudi oil forces Texans to cut their prices.
The sad truth is that Texas shale drillers can’t compete on an even playing field with Saudi or Russia, where production costs are half of those in the Permian Basin. They do not have to drill horizontally. They don’t have to hydraulically fracture the well. Their oil always will be cheaper.
The only reason why OPEC+ cut production was to raise profits. But shale drillers cut into those profits by stealing market share. The only logical reaction was for Saudi and Russia to let the price drop and take back market share.
Over the next decade, demand for oil is going to slow as consumers adopt alternatives, and the oversupply will persist. U.S. shale companies only can survive if OPEC+ manipulates the market.
Current events prove that shale oil relies on an unreliable business plan based on politics, not economics, making it a risky investment.
Tomlinson writes commentary about business, economics and policy. twitter.com/cltomlinson chris .tomlinson@chron .com
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