How An International Conflict Is Causing Gas Prices To Plummet

How An International Conflict Is Causing Gas Prices To Plummet

Russia and Saudi Arabia are locked in a price war to control the oil industry. Here's what it's done to prices for oil around the world.

The Exon on the corner of 22nd Street in Washington D.C. is now selling a gallon of gas for the low price of $1.79 USD. In Ottawa, the Petro-Canada on Bronson Avenue sells a gallon sells for $0.69 CAD. In both cases, prices are a fraction of what they were just two months ago. And while drivers across both countries might be enjoying the benefits of cheap gas, it’s an actualized nightmare for the international oil industry.

The steady sink in gas prices isn’t just happening in Canada or the United States. Instead, the worldwide depreciation of oil over the last month is the product of a pricing war between Russia and Saudi Arabia—the world’s two largest producers of oil. Since the beginning of March, Vladimir Putin and Crown Prince Mohamad Bin Salman have been knocking their prices lower and lower in an attempt to inflict trade losses on the other. They both want control of the oil market, and both of them are willing to hurt their own exports to bring prices back up on their own terms.

It’s an economic all-out brawl.

At the beginning of March, leaders from the Organization of the Petroleum Exporting Countries (OPEC), met in Vienna to discuss how to handle a faltering demand for oil as the Wuhan coronavirus spread internationally. China’s economy had stalled, travel industries were shutting down, and a world-wide consumption of oil sank.

To mitigate losses, OPEC proposed dropping the production of oil by one million barrels a day to maintain an international price floor. With less oil on the market, each barrel sold would be worth more and cushion the economies of oil-producing countries. In a coordinated effort, OPEC could prevent the coronavirus from inflicting losses beyond a certain price point. The plan might have worked—if it hadn’t been for Russia’s decision to disregard the strategy in its entirety.

Russia didn’t want to cut its production. Instead, they dropped their prices and kept the same amount of oil on the market, enabling the exact outcome OPEC had been trying to avoid. Prices sank.

For the rest of OPEC, Russia’s drop in prices meant that they would have to follow suit or risk losing control of sales to Russian oil producers. They would have to play Russia’s game. What Russia probably didn’t anticipate, however, was Mohamad Bin Salman’s resolve to stop them.

Accounting for an export worth $182.5 billion dollars and 16.1 percent of the world’s supply, Saudi Arabia is the world’s largest exporter of oil; it’s what they do best. If Russia wasn’t going to listen to OPEC, maybe they would listen to crashing prices. Leaders in Saudi Arabia decided to undercut Russia’s price point, selling oil at an even cheaper price per barrel, hoping to bring the rogue OPEC member under control. But instead of coming to the negotiating table, Russia cut its prices again and a downward spiral began.

On February 17 the price of a barrel of WTI crude oil cost $53.00 at the close of the day. On March 9th that price had fallen to $31.13. Last Monday, prices hit their lowest point yet, dropping down to $20.09.

In addition to creating some distance from OPEC, Putin might be looking to hurt a US oil industry in a time of global uncertainty. This isn’t the first time Russia has dropped prices in an attempt control the oil market. In 2014, Putin and OPEC targeted US shale oil manufacturers by flooding the market with cheap oil, but the American industry proved hard to beat. Instead of dying off, American oil producers simply cut down on exports and weathered the low prices. When Russia stopped dropped the pressure, American producers started pumping out barrels again.

But things are different now. With COVID-19 making a sizeable dent to many of the world’s largest economies, Russia might see now as the opportunity it needs to shuffle the deck and come out on top.

American energy companies represented in the S&P 500 stock index fell as much as 60% in the course of the past year, according to The New York Times. Already facing financing and debt problems, the American oil industry might have to make some difficult decisions if Russia intends to con­­tinue holding prices under the water.

“As these drilling rigs are idled, we’re going to have layoffs,” Andy Lipow, president of Lipow Oil Associates in Houston, told E&E News.

For now, the risky plunge continues to keep a barrel of oil at an extremely low price point. As of April 2, the price of oil increased a little, but both Russia and Saudi Arabia will need prices to continue climbing before they become sustainable again. In the meantime, they will be taking losses with every sale made.

SPA, a Saudi state news agency, called for an emergency meeting this past Thursday, prodding OPEC and other oil-producing countries to reach an agreement on the unsustainable situation.

Reporting from the Washington Post suggests that the two countries are working on an agreement that could bring down production by as much as 10 million barrels a day. President Trump detailed that number in a recent tweet, saying that he had just met with Mohamad Bin Salman and that the reduction in crude oil on the market would be, “Good (GREAT) news for everybody!”

Leo Briceno is an intern at The Federalist. He is a senior at Patrick Henry College, working towards a degree in political journalism. Follow him on Twitter at @_LeoBriceno.
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