A Saudi-U.S.-Russia Oil Deal Is Not a Good Idea

When Russia walked out on OPEC+ rather than contribute to more output cuts, Saudi Arabia turned on the crude taps. The price collapse has been beyond anything anyone could have imagined.

Could we be witnessing the emergence of an unholy alliance of Saudi Arabia, Russia and the U.S., to “manage volatility,” and incidentally shore up the price of oil? Everyone seems to agree that prices should stop falling; and yet no one seems to argue that a very low oil price is exactly what the world’s economy needs to recover.

The collapse of price support from OPEC+ would have sounded the death knell for many shale companies even without the pandemic. However, if Moscow’s — or Riyadh’s — strategy was to kill the industry, it would almost certainly have failed. U.S. finance thrives on such disruption. The technology is here to stay.

Beyond the immediate emergency, meaningful long-term cooperation to “stabilize” prices would require state intervention or quotas; or U.S. import restrictions. Any of these would mean curtailing the benefits of competition and open entry to which the U.S. shale industry owes its existence. In the short term, such measures would fly in the face of supporting the post-pandemic economy by pushing up fuel costs. In the long term, they would curtail the capacity to innovate on which we depend so heavily in the transition to cleaner fuels.

So the answer on whether the three big producers should be joining hands on the crude price is no. The rest of the world has very little to gain from more intervention in global oil markets. What’s needed instead are better rules to safeguard competition on a global scale.

Read the full article

 

Related Comments

What Are the Medium-Term Implications of Saudi Arabia’s Oil Price War With Russia?”, Dr Carole Nakhle, Apr 2020