The Oil Market Game Is Far From Over

- Apr 20, 2020-

The international oil price war ended in the early hours of April 13.

OPEC +, a group of other major producers, announced the largest production cut in its history, including a two-month initial cut of 9.7 million barrels per day starting May 1, 2020.

Production cuts of 7.7 million BPD/solstice by the end of July 2020;

A reduction of 5.8 million b/d from January 2021 to April 2022.

The us has not yet said it wants to join OPEC + in the game between the world's major oil producers, but has left open the possibility of "additional tariffs on Saudi imports".

There are now three possibilities for America's next move: joining OPEC +;

Do nothing;

Import duties on Saudi crude oil were imposed.

According to the characteristics of "rational man" in economics, each engaged in economic activities taken by the economic behavior are trying in their own minimum economic cost to obtain the maximum economic benefit, so this article try to discuss the pros and cons of the United States to join OPEC + to judge the possibility of the United States to join OPEC +, and wait for the further news.

Why did the us join OPEC +?

At present, public health events have caused severe negative impact on the global economy and oil demand, and the United States is no exception.

When earlier public-health shocks sent oil prices below $40 a barrel, many shale producers were already struggling with debt and profits and needed to cut costs to stay afloat.

North American oil and gas companies face $200bn in maturing debt over the next four years, according to research published by moody's.

High debt and low oil prices have squeezed revenues, pushing small and medium-sized companies in the U.S. shale oil industry to the brink of bankruptcy, and public health issues have exacerbated layoffs in some sectors, from airlines to oil tankers.

"Our industry faces many bankruptcies and thousands of layoffs over the next 12 months;

Within two years, 50 percent of shale oil exploration and production companies could go bankrupt."

Thus, if the United States could join OPEC + to form a larger alliance of global producers and work to cut production and boost prices, it would make it much easier to rebalance the global oil market, and the higher prices might prevent widespread bankruptcies and job losses in the shale oil industry.

Why not join OPEC +?

From a market and legal point of view, joining OPEC + may violate the market mechanism and anti-monopoly laws and regulations that the United States has always claimed as "free competition".

Western countries have long criticized OPEC for "Oil price manipulation." the United States proposed the No Oil Producing and Exporting Cartels Act, which could put OPEC under antitrust litigation.

Although the bill has long been on hold, the house judiciary committee voted it through in February 2019, allowing the justice department to launch antitrust actions against OPEC.

At the same time, since trump took office, more than once publicly criticized OPEC for manipulating oil prices, coupled with the us oil industry and government officials' support for the "free market" and seizing every opportunity to accuse OPEC of interfering in oil prices, so if the us joined OPEC +, it would be a slap in the face.

That's partly why the U.S. is still urging both Saudi Arabia and Russia to end the price war as soon as possible, ignoring comments from OPEC, which is represented by Saudi Arabia, that "OPEC + may agree to cut production on Thursday, but only if the U.S. joins in."

From an economic perspective, although join OPEC + boost gas prices that were on the verge of bankruptcy protection for small and medium-sized enterprises of shale oil industry, but will damage the current benefit end (that is, consumers), in addition, through oil exports to the United States economic benefits is not so attractive, after all, America's economy dependence on oil and gas economic development than Saudi Arabia, Russia is so high.

The United States consumes most of its oil production domestically, while Saudi Arabia and Russia export more than half of their oil to the rest of the world.

Although in recent years the us has overtaken Russia and Saudi Arabia to become the world's largest oil producer, producing 13m b/d, it still lags behind Saudi Arabia and Russia in terms of exports.

According to statistics, in 2019, Saudi Arabia continued to be the world's largest oil exporter, with daily exports of 7.04 million barrels, followed by Russia, Iraq, Canada and the United States, with daily exports of about 5.3 million barrels, 4 million barrels, 3.3 million barrels and 3 million barrels respectively.

According to the preliminary calculation based on the settlement price of WTI and the weekly data of us crude oil exports by EIA, assuming that there are export activities on seven days in a week, the us could earn us $306.52 billion through the annual export of 3 million barrels of crude oil per day, while the us GDP in 2019 is us $21.43 trillion, and the oil export earnings only account for 1.43% of us GDP.

Let's zoom in on the contribution of oil and gas exports to us GDP. In 2019, us exports only accounted for 7.67%. Considering that the actual export structure is not completely single, 7.67% is the upper limit of oil and gas exports.

Compared with the oil and gas economy of Saudi Arabia, which accounts for more than 30% of the total, the U.S. economy is more diversified and diversified, so its dependence on oil and gas economy is lower.

To sum up, in combination with the tenet of the OPEC oil policy, coordination and unity members, maintain the market price stability, ensure the oil producers to obtain stable income - run, no matter from the necessity of policy coordination and unity "oil", or from the perspective of the economic benefits of "stability income", the United States is not particularly strong join OPEC + will and purpose of the pour is also understandable.

Of course, given the unpredictable style and minute-by-minute nature of U.S. President Donald trump's presidency, the possibility of the U.S. joining OPEC + is not out of the question, because in the short term, the benefits to the United States of forming a larger global oil supply reduction coalition are also attractive.

But are they really willing to be restricted from now on in the spirit of freedom, contrary to "market economy, full competition"?

Is there a simpler and easier way for a big country that can basically become "energy independent" (for now, a hefty tariff on Saudi crude oil may be one)?

To this, we think that even in the short term, the United States and Saudi Arabia, Russia and other countries agree with production, but the longer term, such as the United States and Russia non-opec with OPEC members Saudi Arabia as a representative in the national power, economic structure and the economy of oil and gas has a bigger difference, therefore, the new group also solid hard, share the joys and sorrows.