Saudi Arabia and Russia reached an agreement on April 12 to resolve the oil war that led to the severe drop in oil stocks. This comes despite a warning from an official from Saudi Arabia’s department of energy earlier, warning there was no talk of a deal, according to Reuters.
Saudi Arabia and Russia agreed to lead a 23-nation coalition in massive oil production cuts after a long feud and a drop in demand due to the coronavirus crisis, which devastated oil prices. Mexico jeopardized that final pact when it exited the talks after more than 11 hours of negotiations.
BBC reported oil prices have been plunging due to coronavirus lockdowns—which includes grounding planes, halting travels and putting a brake on industries across the globe. A tentative agreement to cut oil production by 10% compared to what was being produced before the pandemic was reached by the Organization of the Petroleum Exporting Countries and its allies.
Fortune reported for the past months, Saudi Arabia had pumped every barrel for sale at lower prices, which some speculated was to punish Russia for the rejection of supporting OPEC output cuts in early March. Both countries have now agreed on reducing daily production by millions of barrels. Martijn Rats, an oil analyst at Morgan Stanley, said “The OPEC agreement will not prevent sharp inventory builds in coming months, and near-term oil prices in the physical market will likely remain under pressure.”
Oil prices fell despite the OPEC nearing agreements, as even a combined reduction of 15 million barrels per day would be too little to stabilize the market according to Reuters. Furthermore, the agreement was also dependent on Mexico’s cooperation.
G20 oil ministers held conferences in order to finalize the draft agreement on April 17. “This is a time for all nations to seriously examine what each can do to correct the supply/demand imbalance,” said United States Energy Secretary Dan Brouillette to BBC.
Mexican President Andres Manuel Lopez Obrador also said “[U.S.] President Trump said the United States committed to reducing by 250,000 [barrels], on top of what it was going to do for Mexico in order to compensate,” as it was meant to help Mexico contribute to a global reduction.
Trump suggested the country might make cuts on April 1. He tweeted, “Having been involved in the negotiations, to put it mildly, the number that OPEC+ is looking to cut is 20 Million Barrels a day, not the 10 Million that is generally being reported. If anything near this happens, and the World gets back to business from the Covid 19…..”
In past years, many critics of fracking were worried because American oil companies have switched to hydraulic fracturing, which would have long-term effects of groundwater contamination. U.S. industry members also expressed skepticism towards the U.S. role in OPEC’s decision in decreasing oil production.
Frank Macchiarola, a senior vice president of policy, economics and regulatory affairs at the American Petroleum Institute, said “our view is simple. Quotas are bad,” and “There’s no reason during this time to try to imitate OPEC,” according to Fortune.
Fortune reported the U.S. shale industry is a prominent victim due to the pandemic, since drillers in Texas and other states rely on American energy industry, which creates millions of jobs and is the world’s largest producer. Fearing that there would be job losses in Texas and other oil-rich states in the U.S., Trump convinced both Saudi monarch and Putin to end hostilities, as it could hurt re-election prospects.
American shale oil is more expensive to produce, and needs the cost of crude oil to be almost 14 times the cost of production to create a profit, according to Al Jazeera. The stock market has also suffered, with ExxonMobil losing more than 12%, and Chevron shares falling more than 15%.
The Chief Energy Correspondent at Bloomberg News, Javier Blas, tweeted a video of Trump criticizing OPEC.
“I hated OPEC,” Trump said. “You know the truth? I hated it—because it was a fix. But somewhere along the line, that broke down.”
The tectonic shift in global oil politics caused the leaders of the world’s three largest producers to dictate global petroleum supply. Daniel Yergin, an oil historian, said in Fortune despite Trump being critical towards OPEC, he “is the one who put it together.” Yergin said, “Of all the deals he’s done in his life, this has to be the biggest.”
IEA reported global expenditure by exploration and production companies in 2020 is predicted to drop by around 32% compared to 2019. It will drop to $335 billion, which is the lowest for 13 years. The reduction of financial resources has an impact on the ability of oil industries for a clean energy transition.