As COVID-19 adversely impacted the global oil demand, Saudi and Russia chose to pick up a fight. In a bid to out-do each other both nations raised the stakes by not agreeing to reduce the oil production leading to a glut in global oil supplies. Oil per barrel slipped and slided down to a range of $25 to $30.
Organization of Petroleum Exporting Countries (OPEC), in 2017 worked a deal with ten oil producing non-OPEC members to ensure that oil price is controlled by an agreed upon per barrel production per day.
With the COVID-19 outbreak, OPEC mandated cutting down oil production by one million barrels per day for itself and for non-OPEC members half a million per day.
SAUDI AND RUSSIA HAS PUSHED U.S. SHALE GAS PRODUCERS ON THE BRINK OF BANKRUPTCY. WAS THAT THE ORIGINAL PLAN WHEN THE PRICE WAR STARTED?
ONE WHO DOESN'T BLINK
Putin rejected the proposal, and the young Saudi Crown Prince Mohammed bin Salman, MBS, in this game, dangerously escalated the stakes with a very dangerous strategy. A game of brinkmanship with an opponent who doesn't blink too easily.
MBS, did not take too kindly to the rejection, and rather than cutting down one million barrel per day, it declared to produce 25 percent more per day, something closer to 3.5 million barrels per day.
Just so Putin gets message, loud and clear, it tried to strangle Russia further, by extending deep discounts and attractive credit terms to Russia's largest customers.
ENTER PUTIN
If MBS had planned to deliver his message loud and clear, he couldn't have done it louder and clearer even if his highness, the MBS, had personally walked up-to Putin, bended and shouted right in the twitching ear of Putin.
The Russian leader, highly strung most of the times, did not disappoint MBS. Putin takes his global image of a serious leader rather seriously, more seriously than any other world leader and has the will to go to any lengths to win a dare. One cannot be heading Russia for as long as Putin has been, just by being pushed around. Vladimir Putin has stared down many tough situations in his rise to being the president of Russia, and made his move.
THE ROULLETTE SPINS - GAME ON
Following suit Russia too increased oil production, offering deeper discounts with more attractive payment terms to Saudi's largest customers and their own, leading to a price drop in oil prices comparable to 1991.
By the time nervous oil hacks and industry watchers hammered furiously at their computers, crunching numbers and plotting colorful graphs, the value of world oil reserves, that countries store for themselves, just in case, had depleted by more than $22 trillion worth its value. Billions of dollars, they opined, of market value had slicked down the drain. The Game was and is still on.
However, Putin's decision, Geopolitical analysts now say, was aimed at US, besides picking up the gauntlet thrown by the Saudi Crown prince.
U.S. Shale gas production uses a drilling technology, called fracking, that cuts down the cost of oil production substantially and releases trapped oil from deep underground at much lower price. A technology that US has now perfected and across the political spectrum in US it is being embraced as a key to be self reliant and be less dependent of OPEC countries.
However, in order for it to be economically viable and motivate the Oil Big-Wigs to invest into this technology, the cost of traditional method of oil extraction should be high. Fracking has to make Oil available at prices lower than what US could get from around the world. U.S. with its monopoly on Fracking and being able to suck out oil from its own land has positioned it as the world's largest Oil producer, ahead of Saudi Arabia and Russia.
Fracking, as it is known has its own environmental disadvantages and along with the known dangers of polluting the environment and water bodies, as well as causing earthquakes and tremors in the vicinity, such as what Oklahoma City has been experiencing. Then there are the unknown consequences, called unknown largely because of lack of enough statistical data.
SURVIVAL OF THE CHEAPEST
With oil available at much lower price, rather than pursue Fracking, countries will find it better to take advantage of a price war, thus rendering this new process unattractive.
For a price conscious industry, this is as close to death knell. If not death knell in true sense of way, then definitely a bruised bloody nose with financial impact directed at US.
This is exactly what happened. An extended price war between Saudi and Russia made it unviable for U.S. Shale gas producers to continue, and they have already reduced their Shale gas production. This extended shut down is leading to a rout in the Fracking market place, with many small to medium U.S. shale gas producers shutting shop for good, and seeking the cover of chapter 11, filing bankruptcy.
Putin, who painstakingly rebuilt Russia as the global powerhouse on the foundation of Oil and Energy and is now a source for Europe's supply of Oil and energy, was making inroads into U.S. backyard, South America. He is now willing to deliver a knock-out punch even at the cost of sustaining a bruised nose. U.S.A already reeling under the economic impact of COVID-19 epidemic is now unexpectedly challenged by a friend and a foe.
v-patrika staff
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