22.04.2020 Author: Salman Rafi Sheikh

How and Why OPEC+ Deal Saved Shale Oil from Total Destruction

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If Trump’s dream, a year or two ago, was to make America’s shale oil industry dominate the world, the recent ‘oil price war’ has completely shattered it, leading to a new dream of ‘co-existence’ of shale and crude oil. As most analysts and American think-tanks believe, but for the OPEC+ deal, the US shale oil industry would have met total destruction. Therefore, as many American political pundits earlier saw it, the ‘core purpose’ of oil price war between Russia and Saudi Arabia was not simply a destruction of the US shale oil industry; it was more about maintaining their respective market shares without geo-economically encroaching upon others’ interests. The US wanted to dominate the energy market; the Saudis wanted to increase their revenue (because other sectors of their economy continue to fail); and the Russians wanted to maintain their share and not just give it to the Saudis and the Americans.

Whereas the deal has settled the oil-price-war now, the US wouldn’t be pursuing its cherished dream of ‘shale oil dominated world’ for a very long time. Here is why:

Before the OPEC+ deal, America’s shale oil industry was fast reaching a breaking point. US senators from ‘oil states’ were already actively seeking to “undermine” US relations with the Saudis because of the Kingdom’s involvement in what they saw as a ‘conspiracy’ against the US. The Saudis certainly backed off for two reasons.

First, they are not Russian allies. Saudi interests converge with the US way more than they do with the Russians. The Saudis could never want to see their core relations with the US being undermined. Secondly, even if the Saudis had actually wanted to completely destroy the US shale oil industry, they could do so only at a great cost i.e., maintaining extremely low oil prices for at least another two years or so—something that the Saudi economy and the Kingdom’s wars could never afford at a time when the economy remains oil dependent and the Public Investment Fund is still finding ‘investment opportunities.’

Besides it, low revenues and additional domestic taxes could have created numerous political problems for MBS, who remains busy in suppressing ‘family rebellions’ at home. In addition to this, the Kingdom’s budget shortfalls, requiring them to eat into their reserves and issue more debt, could be dangerous politically, with Norwegian consulting firm Rystad Energy estimating that at prices in the $34 a barrel range, the kingdom could be projected to collect just half of its 2019 budget revenues this year.

For the Russians, stable oil market prices appear to be the biggest attraction. Through the deal, they will be getting an extra of $70-80 million dollars in revenues per day. This comes in addition to the absence of any worries about shutting down oil wells at timew when demand is low in the wake of COVID-19 crisis. Another bonus will be somewhat better relations with the US as the Russians are now being seen as instrumental in saving the US shale oil industry. It is not just a coincidence that Trump’s direct dealing with the Russians has not led any ‘Russophobic’, not from within the US “Deep State” even, criticise Trump for his agreement that will eventually lead to US production cuts as well.

The deal, in other words, worked for the US in many ways, although the crisis also showed that the US shale oil industry is not powerful enough to take on crude oil producers.

According to an analyst of Council on Foreign Relations, the end of the price war and OPEC+ deal means that the US shale oil industry is no longer on the ventilator. And while “there still will be bankruptcies, but for the time being, the fears that there would be a wholesale destruction of the industry can now be put aside, because the worst of the price war has passed.”

The worst-case scenario, which seemed possible and could be seen on the horizon, for the US was when American oil companies were already cutting jobs by thousands, plugging oil wells, cutting their production and preparing for the worst downfall in more than a generation.

As the reaction from the senators from ‘oil states’ shows, states like Texas, Oklahoma, North Dakota were already expecting massive loses in jobs and revenues. The industry employs over 10 million Americans and accounts for 7 percent of the US’ GDP. According to industry figures, the US’s drop in output could see exports shrinking from over 3 million bpd in 2019 to almost zero in the coming months.

Trump, who is in the middle of his next presidential election bid, couldn’t afford such a catastrophe. It could have cost him the Oval office; hence, his public lobbying with the Saudis and the Russians for doing the deal and thus save total destruction scenario.

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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