Oil prices will recover, and we have Trump’s intervention to thank

Twice in the past two years, U.S. President Donald Trump has defanged the Organization of the Petroleum Exporting Countries (OPEC) and changed the world of oil pricing, which is a major benefit to Canada’s oil and gas industry.

In 2018, Trump intervened when the cartel pushed prices to US$70 a barrel.

In September 2018, he told the United Nations General Assembly that OPEC was “ripping off the world,” and that “we do not support market-distorting behaviour, including cartels.”

He called Saudi Arabia’s King Salman bin Abdulaziz to tell him to back off, noting that his government wouldn’t last two weeks without U.S. military support.

The Saudis listened. Then, last week, Trump butted together the heads of two potentates, Saudi Arabian Crown Prince Mohammed bin Salman and Russian President Vladimir Putin, whose squabble over oil production cuts in light of the drop in demand due to the coronavirus pandemic caused prices to collapse to around US$20 a barrel.

In essence, the Russians refused to make the production cuts requested by the Saudis until the Americans, Canadians and others did the same.

The Russian delegation walked out of the March 6 OPEC gathering and, in retaliation, the Saudis flooded the market with oil, driving prices down to ruinous levels.

At US$20 a barrel, two-thirds of North American production is threatened because it is uneconomic to get out of the ground.

If Canadian and American production shuts down, it would leave the world at the mercy of the cartel again.

Russian production was also threatened, even though the government boasted that it could handle low oil prices for years.

The standoff was shaking markets and threatening oil companies, so Trump intervened.

He was only able to do this because the cartel’s power has been significantly diminished in recent years thanks to competition from Canada and the United States (in 2019, the two North American countries produced as much oil as did Saudi Arabia and Russia combined).

But our vulnerability has always been that our cost of production — for both shale and oilsands — is higher than theirs.

Yet Trump made his position clear: “If they don’t get along, I would do tariffs, very substantial tariffs on their oil. I don’t think I am going to have to, because Russia doesn’t benefit by having this and Saudi Arabia doesn’t benefit by having this,” he said. “Oil and gas are their major sources of income. So it’s obviously very bad for them.”

So, what is the magic figure for oil going forward? Whatever the United States dictates, because it is at once the world’s biggest oil producer and the largest oil consumer. At ruinously low prices like US$20, America’s three producer states — Texas, Louisiana and North Dakota — would be decimated.

But at ruinously high prices like US$70, motorists and industries in all 50 states will be hurt.

Put another way, consumer clout, more than producer clout, has elevated the president of the United States to the de facto head of OPEC.

So has America’s support for Saudi Arabia. And because Canada’s oil industry is integrated with the United States — and is America’s largest oil supplier — our interests are aligned and protected in the new world of managed oil prices.

Significantly, the Russia-Saudi oil price war stopped last week without any requirement that Americans, Canadians or other market-driven countries sign cutback pledges.

On Sunday, OPEC and Russia agreed to reduce output by

9.7 million barrels per day in May and June, which is equal to about 10 per cent of global supply.

On Monday morning, prices were up around one per cent, but were still around half of what they were a year earlier.

While the price-fixers’ truce may be bumpy, as the oil market indicates, Trump has applied the brakes to the cartel’s pricing power, and with it, the geopolitical clout of its members.

And this, as the world climbs out of the coronavirus calamity, is a positive reform because energy is the lifeblood of all economies.

If they don’t get along,

I would do tariffs, very substantial tariffs on their oil. ... Oil and gas are their major sources of income. So it’s obviously very bad for them.