03.04.2020 Author: Salman Rafi Sheikh

In the “Oil War”, Washington Blinks First to Survive

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The “oil war” started by the Saudis (and the US) has, within a matter of weeks, already led to a change in the narrative from purportedly establishing ‘shale oil dominance’ to ‘energy market management’ and avert a crisis that could ultimately destroy the very shale oil industry of the US. This resulted in the US president  holding a phone conversation with Russia’s Putin aimed at discussing ways and means of ‘better managing’ the on-going crisis. The “oil war” that was triggered by Saudi Arabia’s refusal to continue and extend the previously agreed OPEC+ formula, which was instrumental for maintaining stable oil prices for years, has already led to the oil prices plummeting massively, going down to record lows of the last two decades. For the US, the oil war, whereas its initial purpose was to force an unwanted change on Russia and reduce its oil production to give way to an increase in the share of US shale oil on the global markets, could now potentially destroy over half of its shale oil industry, disrupting the very base of the US ‘super-power’ status.

Earlier in October 2019, Trump told US shale producers that the purpose of expanding the oil industry was not just to reduce and end dependence on oil supplies from “foreigners”, but to establish “American energy dominance.” This dominance could, however, would remain unattainable unless the demand for traditional crude oil could be reduced; hence, the Saudi (US) demand for ‘reducing’ oil production.

That the plan has clearly backfired, putting the Saudis against the US and forcing Trump to reach out to Putin to ‘manage’ the energy market. At the same time, the Saudis can still theoretically continue waging the “oil war” not just because they want to increase their own share of oil market—this could happen in the wake of a reduced Russian share—but because of the fact that an ongoing external crisis helps a weakened regime, yet the US cannot simply afford to do so primarily because the shale oil producers do not have the capacity to sustain themselves during this war anymore.

According to reports, there’s no more than 16 US shale companies that operate in fields where the average new well costs are below $35 per barrel. Other shale producers, which budgeted for oil between $55 per barrel and $65 per barrel in 2020, had no other choice but to move to idle rigs, cut staff and generate cash for expenses. In the wake of a continued “oil war” and plummeting prices, there is no gainsaying that the very few shale oil producers which are actually able to cover production costs will be forced to do a wholesale reduction in industry spending and the unprofitable producers will have to stop drilling altogether, which will drive them out of business for a while.

This led Trump demanding the Saudis to end the “oil war”. Those talks were, of course, unsuccessful as the Saudi regime itself pushed by the on-going ‘rebellions’ at home needs an external war to survive politically. The refusal has led to some bitterness coming from certain influential American senators, accusing Saudi Arabia of a ‘conspiracy’ aimed at destroying US shale oil industry.

Senator Ted Cruz reportedly stating that:

“The Saudis are hoping to drive out of business American producers, and in particular shale producers, largely in the Permian Basin in Texas and in North Dakota. That behaviour is wrong, and I think it is taking advantage of a country that is a friend… If they don’t change their course, their relationship with the United States is going to change very fundamentally.” 

For the US president, a continuation of the “oil war” and plummeting oil prices would be devastating, ruining all hopes of US ‘energy domination’ but also devastating his political fortunes.

Already, his ‘trade war’ with the Chinese has led to massive farm bankruptcies in the US, particularly in those states where Trump had won in the 2016 elections. Again, a devastation of shale oil industry, coupled with the COVID-19 crisis, could have massive impact on the next US presidential elections—a situation that any populist of ‘Trumpian’ kind would want to avoid. What adds to its significance is the fact a majority of the US shale oil producers are a large part of his political supporters and are based in the regions where Trump had won election in 2016. As of today, the situation for Trump is grim as the producers continue to lay off their workers.

For the US to survive this crisis, ‘better management’ of the energy market will also have to include and address the question of sanctions on as important Russian projects as Nord Stream 2. The US sanctions target Russia’s Gazprom from expanding and consolidating its towering presence in Europe’s energy market This case is just another example of a US conspiracy against Russian presence and share in the oil market and a push for reducing Russian share and increasing that of shale oil. Any question of ‘better management’ will thus also include ending the politics of sanctions.

Salman Rafi Sheikh, research-analyst of International Relations and Pakistan’s foreign and domestic affairs, exclusively for the online magazine “New Eastern Outlook”.


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