Introduction
Some readers query my continued use of modifiers when referring to a coming 2020 economic recession and unfolding 2020 economic depression. Other media do not. My response is I do not want to peddle mis-information, whether deliberately or otherwise. Formally, an economic recession entails two successive quarters of negative GDP growth, while an economic depression entails four quarters. To date, only one quarter has been completed for 2020.
Linked to this need for accuracy is another consideration. Today’s economic signals display remarkable variability and striking anomalies. Thus, in the broader US macroeconomy, in the same week when that country’s highest unemployment rate in over seven decades (15 per cent) is reached, the stock exchange has similarly reached record highs! And, concurrently, the crude oil market is displaying striking anomalies. Thus, with a negative West Texas Intermediate (WTI) price in April, a month later several pundits are already betting on a recovery before the end of 2020 despite the enormous damage. Recall, the total number of US oil and gas rigs has fallen below 400, for the first time in 80 years; a total that is also 114 fewer than a year ago!
Today’s column continues my presentation on the global crude oil market and the far-reaching consequences for it, arising from the US/Saudi Arabia struggle for market share. I argue that, this is an existential oil war. The US shale oil industry and OPEC cannot survive in their present guise. I argue further on that this outcome is immensely important for the future of Guyana’s oil and gas industry.
All options in play
The incisive, intense, and increasingly incendiary geo-political, economic, and strategic debate concerning the Saudi Arabia/ US struggle for crude oil market share is basically unacknowledged in the local print and social media. Today’s column draws attention to some of this work, focusing on the work of Simon Watkins – the well-known author of the acclaimed book, An Insider’s Guide to Trading Oil and Gas. In a recent Oil Price column, dated April 27 and entitled “Trump Could Use Nuclear Option to pay for Oil War,” he presents the starkest review of the Saudi Arabia/ US conflict I have ever read from an admitted Insider.
First, his insider perspective convinces him the Trump Administration has truly put all options into play. And, given the President’s well-known unpredictability and mercurial temperament, credence must be attached to every threat he makes, implicit or explicit. Second, the Trump Administration is furious that, with COVID-19 placing extraordinary downward pressures on oil demand, Saudi Arabia could have contemplated, let alone implement, an oil war aimed at reducing US market share. The resultant fury has morphed into outright indignation, leading to the President dubbing the war “crazy”, as I had indicated weeks ago.
Third, there is a growing conviction that Saudi Arabia must be penalized for the harm it has brought to the US and the President’s prospects in an election year—the huge loss of jobs and the carnage of shale oil production. Fourth, all this is framed as a betrayal of the long-standing relationship embodied in a US/ Saudi Arabia pact made back in 1945. The pact has three primary features. These are: 1) the US would purchase all its oil needs from Saudi Arabia for as long as it could supply this; 2) as a quid pro quo the US would guarantee the security of Saudi Arabia’s rulership-The House of Saud; and 3) this pact was adjusted over the 2014-2016 period when the US shale sector first emerged as a major oil exporter and Saudi Arabia tried to shut it down and failed.
Watkins believes three key options, all highly incendiary, are in play: 1) the imposition of tariffs on imports of Saudi Arabia oil; 2) the passage of the No Oil Producing and Exporting Cartels Bill; and 3) the threat of using the US’ nuclear option. All three options start from the premise that US security for the Saudi Arabia regime is of incalculable value to the House of Saud. These options are addressed in turn below.
Tariffs
Common knowledge is that President Trump’s US negotiating strategy relies heavily on the imposition of tariffs (or taxes on imports) in trade and economic relations as a tool for advancing US interests in state disputes/claims. Standard economic theory argues the incidence of tariffs (or who pays for them) depends on the elasticities of demand and supply in the markets where the item taxed is trading. Clearly this cannot be to the exclusive and consistent benefit of the tariff-imposing country.
Although US refiners have technically/ technologically adapted to Saudi Arabia’s type of crude (Middle East heavy sour) a priori one can expect, depending on the tariff-size, significant adverse effects on US imports of Saudi Arabia oil. From this standpoint, tariffs would protect domestic US shale, domestic production, and export. Such protection also favours a future regime of higher crude oil prices.
NOPEC
In early February 2019, the US House of Representatives’ Judiciary Committee passed the No Oil Producing and Exporting Cartels Act (NOPEC). A bi-partisan group then introduced this to the Senate. President Trump indicated he would veto this legislation. Readers would be aware that, the US Congress is markedly distrustful of Saudi Arabia’s authoritarian rulership. This distrust has been greatly enhanced by: 1) its gruesome war in Yemen; and 2) the murder of dissident Washington Post’s journalist Khashoggi in its Turkish Embassy.
As the title suggests the legislation seeks to bring the force of US law in to play in order to destroy within the US, and hopefully elsewhere, the essence of OPEC, which lies in its cartel or monopolistic origins. The proposed Act seeks to make it illegal to administratively cap oil and gas prices in a non-market manner. In this way sovereign immunity is neutralized. This exposes OPEC countries’ assets to lawsuits in the US, especially Saudi Arabia the largest holder. Further, the practice is to price this oil in US$.
Nuclear Option
The third and last option one hopes remains no more than a threat. It does, however, demonstrate the existential nature of the US/Saudi Arabia struggle for market share.
Conclusion
Next week I conclude this discussion and then turn to consider whether crude oil as an energy commodity faces an existential threat.
