Russia and Saudi Arabia Selling Oil at $40 a Barrel. US Fracking Industry in Deep Debt. Can't Survive at That Price.
by John Lawrence, April 11, 2020
As if the coronavirus was not a big enough threat to the US economy, Russia and Saudi Arabia are in a price war over oil driving the price down to $40 a barrel. The world now needs less oil because of the coronavirus, but Russia is still producing at the same rate. Not to be outdone Saudi Arabia is also maintaining its same level of production producing a glut on the world market. To be profitable at all the US shale oil industry needs prices to be at least $60 a barrel. So effectively, Russia is forcing the US fracking industry, which is totally overleveraged in the first place, into bankruptcy. To boot Russia can produce oil for less money than Saudi Arabia. The US has sanctioned Russia's oil industry in terms of the NORD II pipeline to Europe and its Turkstream pipeline to Turkey, but there is no way that Trump can sanction the price of a barrel of oil if Russia floods the market.
Market Watch reported:
The rapid growth of the U.S. shale industry is at the heart of a Russia-versus-Saudi Arabia crude-oil price war that threatens to upend a global economy already under threat from the spread of the coronavirus, experts said Monday.
“Russia has made no secret of the fact that it is concerned about the growth of the U.S. shale industry and of its view that repeated output cuts by OPEC were effectively handing market share to U.S. producers,” said Caroline Bain, chief commodities economist at Capital Economics, in a Monday note.
Russia’s rejection last week of a Saudi push for additional production cuts prompted Saudi Arabia over the weekend to slash prices on crude exports in a move analysts said was aimed at taking market share from Russia. But it was Russia’s longstanding frustration with rapidly growing U.S. shale industry that prompted Moscow to resist the push for additional production curbs.
Saudi Arabia over the weekend slashed prices on oil exports, a move that traders took as a sign that the Riyadh was ready to take on Russia in a global price war that would flood the world with crude at the same time demand is curtailed by the COVID-19 outbreak.
The fracking industry has survived basically on zero percent interest loans from Wall Street. The whole American economy is based on no interest loans with the Federal Reserve providing quantitative easing whenever banks or major industries needed money. The average American pays through the nose for a loan. The whole economy is on life support, and it would collapse unless it is continually salvaged by government deficit spending and the Fed flooding the markets with liquidity. The fracking industry and the banks that carry its loans are in trouble now because Russia is essentially controlling the price of oil and pricing it below what the fracking industry needs just to pay on its debts. Now that the world needs to consume far less oil because of restrictions on travel, less greenhouse gasses are going into the atmosphere. This is the silver lining which is not being talked about.
So now the world is at war, not one nation towards another nation, but the whole world vs the coronavirus. Finally the world is coming together against a common enemy. So far the world has not come together in the same way in the common fight against global warming. If it can come together in the fight against the coronavirus, why can't it come together in the fight against global warming which is far more serious. The coronavirus is so far only killing the elderly with underlying conditions. So nursing homes have to be very concerned about their patients, but so far in the US young people that have acquired the virus generally get over it just as they would with the flu virus. The coronavirus may kill millions, but global warming has the potential of killing billions.