I got gas for $1.31 per gallon this week.
Thank you Russia and Saudi Arabia for providing the glut in the oil market that has saved me gas money for the past month. But, hopefully that glut in the market will shrink now that OPEC and Russia have made a deal to cut oil production.
On April 12, with extreme U.S. pressure (bordering on aggression) Saudi Arabia, Russia, and other affiliates struck a deal to make the biggest oil production cuts in history. This slows the brutal price war between OPEC and Russia. North American oil producers are still reeling, however, and market demand is incredibly unpredictable. The market is still being dodgy, at best.
The oil price war began in March after the mounting panic over the coronavirus pandemic caused a massive collapse in demand on oil. With the global demand falling, OPEC held a summit on March 5 and agreed to cut oil production by an additional 1.5 million barrels per day. Saudi Arabia, acting as the representative of OPEC, told Russia, leader of the non-OPEC oil producing countries, to follow the decision of the summit. Russia rejected this decision, which led to a dispute and breakup in communication between OPEC countries and Russia triggering a price war.
Since Russia would not abide by OPEC’s decision to cut production, Saudi Arabia’s Crown Prince Mohammed bin Salman decided to open Saudi’s taps and flood the market with oil. Russia followed Saudi Arabia’s lead and did the same.
This led to a glut in the market and a free fall in oil prices. U.S. oil prices fell by 34% while crude oil dropped by 26%. Oil futures plummeted 31% within minutes, which was followed by investor panic that led to further selling across risk assets. Coupled with the broader coronavirus panic, this caused a stock market crash.
While Americans loved that gas prices suddenly dropped under $2 per gallon — prices we haven’t seen since 2002 — it left the stock market gasping for breath. The declining market and the fight for control over oil prices wrecked American oil producers and threatened America’s energy independence. The fall in demand coupled with Russia and OPEC countries flooding the market led smaller oil firms in Texas and Canada to shut in thousands of oil wells and stop production until at least May.
“We’ve never done this before. We’ve always been able to sell the oil, even at a crappy price,” Jim Wilkes, president of a Fort Worth firm, told the Wall Street Journal.
American oil tycoons pleaded with Trump at the beginning of the price war to embargo oil exports from Saudi Arabia, Russia, and other OPEC affiliates in order to support the American oil sector and keep many of its firms from going bankrupt. And on April 12, after Trump pressured Russia and Saudi Arabia, the OPEC cartel announced that it would cut 9.7 million barrels per day in production through May and June. This is equivalent to about 10% of the global supply, and OPEC said it will continue with market reductions until April 2022 in order to stabilize the suffering global crude market.
This is the largest cut ever made in the oil market, which the U.S. was aggressive in bringing about. And the initial market reaction to the deal was great as West Texas Intermediate, the US benchmark, jumped as much as 8.7%. The prices did swing back down the next day, but the initial jump was promising.
Christi Craddick, a regulator from the Texas Railroad Commission (which regulates oil in Texas) praised Trump for playing hardball to protect the American oil sector.
“[His] aggressive actions and continued engagement to bring Saudi Arabia and Russia to the table to reduce global oil production was crucial to defending the domestic energy industry,” Craddick told the Wall Street Journal.
Though the initial reaction to the international deal and the massive slashes was positive, investors are still concerned that the cuts will not be big enough because of such low demand worldwide. With the coronavirus putting the world on lockdown, there is hardly any demand for gasoline, diesel and jet fuel. Though OPEC countries agreed to cut production by 9.7 million barrels per day to address the glut in the market, predictions are calling for oil consumption to fall by as much as 30 million barrels a day this month.
But with so much unpredictability in the market, it’s simply too hard to predict demand. Now that Trump has exerted his influence over the global oil market, some might argue that he should be prepared to again pressure OPEC and its affiliates to make further production cuts. After such bold and aggressive moves to get the April 12 deal done, Trump really does hold the reins on global oil production. As Helima Croft at RBC Capital Markets said, “Trump essentially became the de facto OPEC president.”
But now that a deal has been struck between OPEC, Russia, and the United States, it’s time to leave oil production alone and let demand sort out the supply. That’s not to say the April 12 deal was a bad idea. We needed to stop Russia and Saudi Arabia’s massive flooding of the market, not just to save the American oil sector, but to keep the world from running out of storage space for oil that wasn’t being bought: Before production was decreased, Houston’s Simmons Energy analysts predicted that with such lopsided supply and demand, the world would run out of places to store oil productions in about 60 days. And investors predicted that if oil inventories had been built up much more, then prices would have crashed globally and hit the markets once again.
“This restrains the buildup of inventories, which will reduce the pressure on prices when normality returns,” Daniel Yergin, vice chairman of IHS Markit, told the Wall Street Journal.
But now that production has been cut, the market needs to be left alone to realign supply and demand. This will take time because the world is going through an unprecedented crisis with COVID-19 that is leading to extreme drops in demand. But, if left alone, the market will eventually sort itself out. The April 12 deal was a necessary measure, but it can’t turn into a habit, or the market will stop being able to naturally adjust itself and price wars like this one will become more frequent. And the broader global economy simply cannot sustain price wars.
$1.31 gas prices are nice, but a global economy that is not in shambles is much preferred.
Abby Liebing is a senior studying history. She is the associate editor of The Collegian and a columnist on foreign politics.