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Oil Price Crisis and the US - Canberk Taze

Oil prices have started to drop on February 21 at an exponential rate and have continued to drop until March 9 from 58 USD per barrel to 34. It has resulted in various changes to the US economy and economy of the world and resulted in a panic amongst global investors in what could be called a stepping stone to a global financial crisis or a recession. According to Huffington Post, this has been the greatest single-day drop in oil prices since 1991, which was the result of the Gulf War and the 1990 oil price shock.

In response to the price war between Saudi Arabia and Russia, White House is considering a bailout (low-interest government loans) to the US oil industry, especially to drillers. However, it is unclear what this bailout would achieve, and The American Petroleum Institute (the most prominent oil lobby in the US) commented on it saying they are not asking for a rescue and are not negotiating with the administration.

US energy industry and some particular state economies such as Texas, Pennsylvania, and North Dakota have boomed thanks to the developing fracking industry, which produces shale oil from hydraulic pressure in the last 15 years. However, these industries rely heavily on investments, and shale oil producers gain their investments mostly from bonds they issue.

According to a Wall Street Journal analysis, 30 largest shale producers in the US have lost 50 billion dollars between the years 2012 and 2017. Furthermore, from 2015 to 2016, 91% of all corporate debt defaults were from the oil and gas industry. It has naturally resulted in unhappy investors. Ed Crooks, the vice-chairman of the energy consultancy firm Wood Mackenzie has stated that this crisis would improve the industries’ productivity and commercially and financially sound behavior since the companies would not be acting with complete trust in a bailout from the US government. He also said that unlike a bailout to the banking industry, a bailout to the energy industry would not be saving a vital business for the economy to keep running, since there is a possibility of importing the necessities.

Of course, on the political side of things, swing states that are essential for a presidential campaign, especially Pennsylvania, might be getting more attention from the candidates since the state’s GDP relies heavily on the fracking industry and jobs created from it. The crash in the market could also result in a drop of approval ratings for POTUS Donald Trump, who does not seem to be reacting to the crash apart from the bailout it had offered to the drillers. However, on March 9, when the oil price has seen its lowest, Trump tweeted that along with Saudi Arabia and Russia, Fake News was also a reason for the market to drop. Trump further tweeted that the price crash was good for the consumers.

The DOW Market Index has dropped by 5,000 points as a result of the price shock. Of course, with the combination of coronavirus and oil shock, analysts are having difficulties with predicting future oil prices and oil demand. Energy consultants are giving vast price ranges that vary between 21 USD to 44 USD for the year 2021. Some companies say oil prices could go down to 27,80 USD per barrel.

It should not be forgotten that although the price looks stable for now, it could still go down under analysts’ predictions. The crown prince of Saudi Arabia, Mohammad Bin Salman, has taken a direct approach to solve the conflicts within OPEC+ by competing with Russia and increasing its oil productions, disregarding the demand for it. They are now trying to pass the 10 million barrels production a day milestone, but their final milestone is 12 million barrels a day. With the predicted decline or a stale oil demand resulting from precautions against battling coronavirus, oil prices could decline even more in the future. What the US should be careful about is if the oil demand increases as the economy and world stabilize over time, which the world would be buying oil from. Since the Saudis are increasing their production while the demand decreases, the world’s biggest oil producer US (with 12.2 million barrels a day) will face competition as the vast stocks of Saudis will be ready to be sold after stabilization. Of course, it should not be forgotten that the US does not export all of the oil it produces as they have to satisfy their own countries needs as well. Therefore, the US should not be as calm as it seems now about the oil price crisis since after the wind blows, their economy could face an even more significant impact.


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