07.04.2020

Most experts and analysts are inclined to believe that the possibility of concluding a new OPEC+ deal is unrealistic.  The US president criticized OPEC, calling the organization a cartel and a monopoly, and lamenting that OPEC is unfair to the United States.  The US does not want to participate in a reduction in oil production.

There is no regulator in the United States that would force private oil companies (and there are no state-owned ones) to obligatorily reduce the volume of produced oil.  The US has strong antitrust laws that prohibit cartel conspiracies.  For example, the head of an American oil company will think several times before calling the CEO of a competing company because tomorrow it will be used by the prosecutor’s office as evidence of a cartel agreement.

The US has no economic need to reduce its oil production; the country is the largest oil producer, but also the largest consumer and net importer of oil.  Why reduce the production that the American consumer will purchase anyway?

Reducing oil production will be a political suicide for Donald Trump.  Reduced oil production means an additional reduction in jobs in the country covered by the coronavirus, where already 7 million Americans have stood in line for unemployment benefits.  According to the American Petroleum Institute, in 2015, 10.7 million people worked full and part time in the US oil sector.  According to a 21st Century Institute of Energy study commissioned by the American Chamber of Commerce, the shale oil industry employs 1.7 million Americans.  Most of the US oil is produced in Texas, North Dakota, New Mexico, Oklahoma, Colorado, Alaska, California, Wyoming, and Louisiana.  Besides California, all these states traditionally vote for Republicans.  However, if Trump does nothing to save jobs in the oil sector, Republicans could be crushed in the November 3, 2020 election.  This is also a question of the future political career of Trump himself.

Currently, the United States has made a last attempt to force OPEC + to renew the agreement and further reduce oil without the involvement of the United States.  With this purpose in mind, Donald Trump held telephone conversations with President of Russia Vladimir Putin and Crown Prince of Saudi Arabia, Mohamed bin Salman.  Saudi Arabia has agreed to negotiate online the reduction of oil production.  Russia has also agreed to lower oil production, although it made it a condition for partner reduction in oil production by the United States, which seems like a completely unrealistic demand.  Another unrealistic demand of Moscow is that the cutback in production from the pre-crisis date on the oil market counts, but Riyadh has already begun to intensively produce oil and it is unlikely that the Saudis will do that.  Even before negotiations were held, Riyadh and Moscow already had a fight, remembering who was to blame for breaking the OPEC+ deal in early March this year and who had started a fight against American shale oil.  What to expect from the negotiations themselves? Distrust is the biggest obstacle to negotiations.

All OPEC + countries produce approximately 52 million barrels per day.  A reduction of 10 million barrels per day proposed by the United States need to cut oil production by 19.23% of the countries of the OPEC +, but can return prices at around $35 per barrel.  The same reduction of 15 million barrels per day, will require a reduction in oil production by 28.84%, and is likely to lead to an increase in oil prices to $45 dollars per barrel.  Coronavirus has led to an unprecedented drop in hydrocarbon demand.  World daily oil consumption fell from 100 million barrels to 85-80 million.  Even without the virus, the price of oil was gradually declining due to the oil market oversupply.   Therefore, the proposal of the US President is logical and can solve the problem of low oil prices.  Kazakhstan should support both options for reducing production.  Yes, revenues will decrease, but profitability will continue.  The main obstacle to concluding a new deal under OPEC+ is Moscow’s unrealistic demands.  It is better for Russia to moderate its appetites and be content with little than to have nothing at all at a price of $ 10 dollars per barrel.

If the OPEC+ countries agree to reduce oil production, the American oil industry will grow in two years (after stagnation as a result of the economic downturn due to the virus).  In 2025, in this case, I expect the United States to enter the list of leading hydrocarbon exporters in the world.  OPEC+ countries will be content compressed by the market and reasonable prices in the short term.  A gradual drop in oil prices is inevitable after the global economy recovers from the effects of the coronavirus.

At the same time, the United States does not exclude the failure of negotiations under OPEC+.  That is why, on April 3, Mr. Trump held a meeting with the CEOs of the four largest US oil companies in order to understand the needs of American oilmen.  The next day, the US President did not rule out the imposition of tariffs on oil imports from Saudi Arabia and Russia.  If OPEC+ negotiations fail, this will be a likely scenario for the development of the global oil market.

In fact, this means that OPEC+ is in the zugzwang position.  OPEC+ was offered either to independently reduce production and ensure further growth of US shale oil, or duties will be introduced that will close the world’s largest US oil market.   This in turn will lead to a huge oversupply of oil markets in the world and, as a result, a sharp drop in oil prices to minimum levels.  The United States will benefit in any case, as well as the Arab countries, exporters of oil, which developed the infrastructure of their countries and other industries.  The Arab countries of the Persian Gulf have high quality oil with the lowest cost.

Of course, the devil is in the details.  Most likely, the tariff offset mechanism for countries that buy American goods will be provided in US tariffs.  Americans are very good businessmen and reasonable on tariffs.  The United States is well aware that if Saudi Arabia does not have money as a result of the fact that its oil becomes uncompetitive in the US market, then the kingdom will not be able to buy American weapons either.  Therefore, I assume that the Riyadh likely to receive these deductions that will reduce the effect of the tariff to the closest US ally in the Middle East to zero.  But countries like Russia are clearly left overboard.   In this regard, although the United States is not our main market for oil exports, Kazakhstan needs to consider including deductions for US oil duties against goods that Kazakhstan buys from the United States.

The United States is likely to help its allies, the Arab Gulf countries, by providing borrowing opportunities for both private companies and the governments of these countries.  In addition, the small population of these countries in proportion to the accumulated reserves will allow them to safely survive low oil prices.  Russia under sanctions is deprived of the possibility of borrowing on international markets.  Yes, Russia’s reserves are significant, but in proportion to the population they are low.  Over the past month, Russia has already spent $50 billion dollars in its reserves to support the Ruble and in connection with the coronavirus.  With a long period of low oil prices, Russia (like Iran and Venezuela) in the end simply will have no choice but to run on a full printing press, which will bring down the ruble and lead to hyperinflation.  The USSR had to do this and not from a good life.

From all this history, Kazakhstan should draw the appropriate conclusions.  Good relations with the USA are the guarantee that the country will come out with the least losses for the economy.  In this situation it is necessary to give due to Kazakhstan’s foreign policy, which has always been friendly to all countries and tried to establish the most favorable relationships with all countries, both in the economy, and in diplomatic relations.

Author: Nurzhan Shaikenov