As the coronavirus spread around the world over the last 3 months and economic production declined in China, fear of the contagion has prompted a sharp decline in travel and a weakened demand for oil. Slowing the spread of the disease and ‘flattening the curve’ to allow the healthcare system some opportunity to treat those who become seriously ill will require isolation and sheltering in place, including the prospect of government mandated mass quarantines, like the one we now see in Italy. Those reactions to coronavirus and Covid 19 have dramatically decreased fuel consumption and the demand for oil, threatening the profits of the world’s major oil producers.
The US has recently emerged as the world’s largest oil and gas producer due to expansion of fracking and production of shale oil. The rise of the US as the world’s leading producer of oil and gas has also threatened to undermine the economic power base of Vladimir Putin in Russia and Mohammad Bin Salman in Saudi Arabia. Putin and Bin Salman are not the sort of men who tolerate threats to their power. But what could they do about the new kid on the block?
Well, the US might be the biggest producer, but that production is decentralized among dozens of competing corporations and the costs of production are high, while Puin and bin Salman pretty much control the production in Russia and Saudi Arabia and the Saudi’s production costs are very very low.
Modeling with big data allows those with access to that data the ability to do some amazing and frightening things. Hundreds of thousands of ‘what if’ simulations can be run in a matter of minutes. Including ones that ask things like ‘in a soft market for oil what would happen if the price suddenly dropped by 10% or 20% or 25%. Or like it did day before yesterday by 27%. The simulations would likely show that a 27% drop in oil prices overnight would bankrupt the US Shale Oil industry — stripping half or more of the value of the companies in that business.
That is exactly what happened yesterday. While the US stock markets fell by 7 or 8% yesterday, the biggest losers were US shale oil producers who lost about 50% or more of their market value. The US shale oil industry is now crippled if not destroyed and the Saudi’s didn’t have to actually pay much of a price for that. They only needed to announce a drastic cut in prices and promise to ramp up production. That alone, in the context of coronavirus effects on oil demand, was enough to cripple their biggest competitor.www.washingtonpost.com/…
Bin Salman recently sold a small portion of the Saudi oil company to investors, but couldn’t get the high valuation he wanted www.nytimes.com/…. It looks to me like he has now adopted a different tactic, rather than attempting to diversify by selling shares in Saudi controlled oil to raise money to invest in alternate economic opportunities, Bin Salman has now manipulated the market to destroy the value of his competitors in the US. If he wants, Bin Salman and Putin can now just buy their US competition, own them for half price or maybe even less. Why try to compete when you can just be your competition. How clever was that.
So, ask who is buying stock in all the US shale oil producers who lost half their value yesterday. If you can’t out produce them, destroy their share price and just buy and own them. At at fifty cents on the dollar I suspect bin Salman and Putin will be deep in the mix of buyers.
If we pull back the veneer of democratic institutions regulations and social norms the world economy looks more and more like one giant kleptocracy. A high stakes game of oligarch v. oligarch.