(Bloomberg Opinion) -- Well there’s a surprise. During a telephone conversation on Monday, Presidents Donald Trump and Vladimir Putin “agreed on the importance of stability in global energy markets.” However, it’s very unlikely either will go beyond extolling stability and waiting for (or pressuring) somebody else to do something about it.
Trump, speaking at the White House Tuesday, talked of many meetings that are going to put this all right. He said Putin and Saudi Crown Prince Mohammed bin Salman are “going to get together and we’re all going to get together and we’re going to see what we can do.” Then he added that “the two countries are discussing it. And I am joining at the appropriate time, if need be.”
But there’s no evidence that Russia and Saudi Arabia are talking and, even if the three leaders do get together, don’t expect a meeting to lead anywhere. Neither president, nor the crown prince, is renowned for his statesmanship or flexibility.
Putin’s most recent diplomatic “successes” include the annexation of Crimea and sending troops to support Bashar al-Assad’s regime in Syria. Trump has become the master of the empty photo-op, most notably with North Korea’s Kim Jong Un. MBS, as the de facto Saudi leader is known, led his country into a protracted conflict in Yemen and a blockade of Qatar, neither of which shows signs of bringing results.
In the energy sector, points of contention between Trump and Putin include Russia’s role in Venezuela’s oil export trade; U.S. sanctions on Russia’s oil and gas industries, including those targeting the second Nord Stream gas pipeline from Russia to Germany and others that have prevented foreign investment in Arctic oil and gas projects; and Russia’s own nascent shale sector. U.S. Energy Secretary Dan Brouillette and Russian Energy Minister Alexander Novak had a “ productive discussion” by phone on Tuesday and agreed to “continue dialogue among major energy producers and consumers, including through the G20,” the Department of Energy said in a statement.
Putin has no interest in throwing another lifeline to the U.S. shale sector. Trump still seems to see the problem as being caused by Russia and Saudi Arabia both going “crazy” and launching a price war.
Let’s get one thing straight. The collapse in oil demand as a result of the worldwide response to the Covid-19 virus is a much, much bigger problem than the additional barrels threatened by Saudi Arabia and Russia — none of which has arrived yet. As airplanes stop flying and drivers stop driving, they are going to struggle to find buyers for their oil, just like everyone else. Saudi Arabia is already threatening to boost its exports by a further 600,000 barrels a day in May because its own refineries don’t want the crude. This is simply more stranded oil trying to find a buyer.
Goldman Sachs estimates that global oil demand this week is down by 26 million barrels a day, or 25%. That’s more than the combined consumption of the U.S., Canada, Mexico, Central America and the entire Caribbean.
Sadly, the loudest voices in America still seem to be those calling for the use of bully-boy tactics against the world’s other heavyweights. A letter sent to Secretary of State Mike Pompeo last week from six Republican senators, including Lisa Murkowski from Alaska and John Hoeven from North Dakota, characterizes the Saudi and Russian decisions to end output restriction as “economic warfare against the United States.”
The lawmakers argue that “Saudi Arabia must change course,” when what they really mean is that the kingdom led by Crown Prince Mohammed bin Salman must return to its previous course, and they name-check the whole gamut of pressure tactics the U.S. has at its disposal to get it to do so, from the threat of “tariffs and other trade restrictions to investigations, safeguard actions, sanctions, and much else.”
I get that senators from oil-producing states want someone else to cut back to keep the oil price high enough so that their local fossil-fuel industries can keep functioning. But the Saudis might well argue that the current situation would be easier to deal with had the U.S. not doubled its oil production in less than a decade.
Targeting Saudi Arabia and Russia for behaving as American leaders have always urged them to behave — by removing “artificial” restrictions on their oil production — will not solve the crisis faced by oil producers everywhere. As I wrote Sunday, we are now getting the free-market in oil. The demand destruction caused by the collapse in oil demand as a result of responses to the Covid-19 virus will not be solved by sanctions or tariffs.
The world’s Big 3 oil producers might have had a chance to get together to organize a global response to the temporary loss of oil buyers, but they squandered it. As things stand, the companies (and countries) that bear the brunt will be those who can’t find buyers or storage tanks for their oil. No amount of bullying, or half-hearted diplomacy, can change that now.
(Adds comments by Trump and the energy department in second and fifth paragraphs.)
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Julian Lee is an oil strategist for Bloomberg. Previously he worked as a senior analyst at the Centre for Global Energy Studies.
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