Since 1960, the OPEC cartel has imposed de facto “taxes” on the world’s consumers by manipulating oil prices. But it, too, has become a casualty of the coronavirus. The anti-viral lockdowns sweeping the world have destroyed oil consumption and prices, lowering usage by 30 percent and triggering a conflict among its members that has undermined its pricing power and geopolitical importance.
It began on March 6 when the cartel’s 15 members, plus Russia and a handful of other countries (known informally as OPEC+) met and deliberated as to how to allocate production cuts. Moscow’s energy minister balked, then stalked out of the meeting, refusing to make any cuts unless the Americans, Canadians, and other non-OPEC countries were forced to do so as well. This proved to be a fatal overreach.
Angered by such unilateralism, the Saudis flooded the market with crude, causing the biggest price crash in history, driving prices from around $46 per barrel down to the mid-$20s. A similar maneuver had worked for the Saudis in 1972 when driving down prices caused an outlier to capitulate. But not this time. Russia dug in its heels and bragged its economy could withstand low prices indefinitely. The stand-off caused market chaos, and was quite suicidal, considering that the two antagonists, to paraphrase late Senator John McCain’s description of Russia, were just “gasoline stations posing as nation-states”.
By 2019, oil production in the United States and Canada had matched that of Saudi Arabia and Russia combined. On its own, America was both the world’s biggest oil producer and its biggest oil consumer. The reality of possessing this powerful counterweight, as well as domestic politics, dictated a new policy imperative for the United States: that prices be stabilized and modulated. At ruinously low prices like $20 per barrel, America’s three producer states—all “red” Republican states: Texas, Louisiana, and North Dakota—would feel serious economic pain. But at ruinously high prices—like those experienced in 2018 (around $70)—motorists and industries in all 50 states would be impacted. Put another way, consumer clout, as much as producer clout, essentially meant that the United States needed to mitigate OPEC’s pricing power.
The attitude of America’s oil patch, and of President Donald Trump, toward the cartel was already well known. In September 2018, when oil prices threatened to exceed $70 a barrel, Trump told the UN General Assembly that OPEC is “ripping off the world” and that “we do not support market-distorting behavior, including cartels.” He intervened and reportedly directly called Saudi’s King Salman to remind him that his government wouldn’t last two weeks without U.S. military backing. The Saudis understood the message and eased production limits to lower prices.
In this recent spat, prices had been deliberately driven to ruinously low levels to teach Russia a lesson, but had the knock-on effect of threatening the viability of most American shale oil and Canadian oil sands producers. Bankruptcies were announced, jobs lost, and wells were shut in, all amidst a monumental contraction in the broader markets driven by the coronavirus-related powering down of the global economy. Echoing Trump’s efforts in 2018, North Dakota Senator Kevin Cramer openly questioned the wisdom of perpetually supporting the Saudis. “We cannot tolerate having 2,500 troops and missile defense batteries protecting Saudi Arabia’s oil assets while they declare war on our oil assets in North Dakota and across the United States,” he said.
The impasse with Russia could not have come at a worse time for Saudi leader Bin Salman either. On March 7, the day after he opened the spigots to spite Moscow, he executed an under-reported purge of 20 senior princes to impede an alleged coup that aimed to prevent him from succeeding his father the King. This made America’s military help even more critical, along with its support in the Saudi conflict against Iran and its surrogates in Yemen.
To break the stalemate, Trump butted the heads of the two potentates—Saudi Arabia’s Crown Prince Mohammed bin Salman and Russia’s Vladimir Putin—and threatened them with protectionist tariffs. Lengthy phone calls with both contributed to speculation that Trump would horse-trade geopolitically with his two autocratic “friends”. But such speculation misunderstood the nature of the situation. Putin’s agenda was vindictive and driven by his most powerful trusted oligarch Igor Sechin, CEO of Rosneft Oil Company.
Both Sechin and his company had been hit with punitive U.S. sanctions after the 2014 invasion of Ukraine, and in February over Rosneft’s support of Venezuela’s national oil giant to prop up Nicolas Maduro. In addition, punitive U.S. sanctions last December successfully halted construction of a pipeline by Russia’s Gazprom aimed at flooding and dominating the European Union with Russian natural gas. As early as June 2019, Sechin was accusing the United States of using energy as a political weapon, saying that the U.S. golden age of energy had become an “era of energy colonialism” for other countries. Speaking at an economic forum in St. Petersburg, he said a third of global oil reserves were restricted by U.S. sanctions on Iran and Venezuela, and that this was aimed at propping up high-cost shale oil production. “The Kremlin has decided to sacrifice OPEC+ to stop U.S. shale producers and punish the U.S. for messing with Nord Stream 2,” said Alexander Dynkin, president of the Institute of World Economy and International Relations in Moscow, a state-run think tank. “Of course, to upset Saudi Arabia could be a risky thing, but this is Russia’s strategy at the moment—flexible geometry of interests.” A think-tanker may try to dress a policy up as a strategy, but it’s clear that thirst for revenge was the policy’s motive force.
By April 7, however, both the Russians realized how shortsighted they had been, and they sat down to negotiate again at OPEC+, which collectively agreed to cut back production by roughly 10 percent. Tellingly, Russia was forced to agree to deeper cuts than Saudi Arabia, an embarrassing climb-down for the instigator, according to Andrey Kortunov, director of the Kremlin-funded Russian International Affairs Council. He described the decision to get into this situation as a strategic mistake. “And now we’re paying the price, a much higher price than we could have paid. This looks like a victory for the U.S., and Russia ends up a bigger loser than Saudi Arabia.”
Even more significantly, the U.S., Canada, Norway, and Brazil did not make any official commitments to cut. And American oil interests, led by Trump, established the precedent that oil prices in the future must be managed, not manipulated. Oil prices, of course, crashed further after the deal, though this was expected given excess supplies. But the bigger story is that the cartel has been chastened, threatened, and will for the time being think twice about holding nations to ransom in order to continue streaming obscene oil profits into the Swiss bank accounts of oligarchs and sheiks. This, at least, is a welcome development as the world slowly climbs out of the coronavirus recession.