Behind the Russia-Saudi Breakup, Calculations and Miscalculations

This shows a complete failure to understand capitalism. Lowering prices of oil will strain some higher-cost frackers. If the length of time is too long to be sustainable for some companies, they will certainly fold. But the oil and gas in the United States is not going away, and when the price is sufficient to make a profit again, capitalism will provide the opportunity for more companies to form, and start where the others left off.

This Putin/SAudi thing seem like a double suicide. Sure the Saudi's can go lower than anyone. But their timing may just send the world into a deep recession. Everyone will be asking if it is /was worth it.

'...nationalist-minded Russian economists intent on punishing the United States, no matter what the cost to Russia.' And it seems that that is exactly what the medieval kingdom is doing as well, hardly unintentionally. And that is why our government has to react. A king (!) somewhere decided to decimate an important industry in USA and this should almost be taken as an assault to our national integrity which is why the government must not leave it as a business tempest, since it is not. This does not excuse the obvious idiocy of the shalers who need to pay price for their ridiculous business but they must not be wiped out, which is the writing on the wall right now.

"Trade Wars Are Good", until they aren't!

The writers should have included what the Ruble was trading at to the Dollar just before the price war and what the ruble was trading at in todays story.

Reading this story I’m reminded of the joke about the Russian peasant who finds a magic lamp in the mud while digging for beats and when told by the Jeannie that is granted one wish for whatever he wants thinks about is for a minute and says, I want my neighbor’s cow to die.

The Saudi's need to be cautious here.. lest they become a top target of Russian disinformation and intelligence operations.

In the middle of a global public health pandemic which is shaking the economy, Russia and the Saudis chose to pick a fight resulting in further economic losses. Because Trump, belittles competence and diplomacy, there is no American leadership to help mediate and America suffers. Had enough? NO MATTER WHO, VOTE BLUE

Have Vladimir Putin and Mohammed bin Salman really fallen out of love? Could this be a strategy they've concocted in secret to corner the world's oil markets? Wouldn't Putin seek to reduce Saudi Arabia's oil production capabilities if the break-up were real? Wouldn't Putin go so far as to attack and destroy some or all of Saudi Arabia's oil production capabilities if this break-up were real? Either Saudi Arabia is going to be attacked or the break-up is a ruse to corner the world's oil market. I would guess the latter.

Think about this: Suppose it’s just a fake fight and what’s really happening is a prelude to causing a collapse in the US oil industry and, perhaps our entire economy. The entire oil industry has become highly leveraged and crashing prices will jeopardize not only the companies themselves but their lenders as well. The fracking industry needs $50/barrel to be profitable. Oil is in the low $30s range nowadays and if the Saudis and Russians can keep it that way for, let’s say, even six months or a year, it could trigger a devastating financial crisis. Of course, the current administration has scoffed at supporting renewable energy so we are that much behind in countering an oil squeeze like the one that’s happening. Not to mention Trump being particularly under the influence of the Saudi and Russian culprits and probably unable or unwilling to get them to back off.

SA holds all the cards here, and Sechin and putin, crooks to the bone, have profited personally from controlling all russian oil companies. The well-deserved sanctions we placed on russian oil companies thwarted their plans to reap huge rewards from the lengthening Arctic drilling season, which also requires deals with Western oil companies (for technology), also denied by the sanctions. russian oil is much more expensive to extract than SA oil, and, as the entire russian economy (and the crooks who personally profit, i.e., putin and Sechin) are suffering now as never before. There is something unsaid in this new rift. Could the Saudis be responding to some American "stimulus"? Unclear. Is it personal, between Mo Bone Saw and putin? Also unclear. But if this situation was engineered to cause maximum damage to russia's economy, in the midst of the Covid-19 market disruptions, it could not have been better timed. As for our shale-oil extraction, the price crash does indeed make the process unprofitable, however the steep drop in demand, while hopefully temporary, softens the blow a bit.

Sadly, Tariff Man is missing in action when it comes to the Arabia-Russia price war. President Trump was happy to levy tariffs on China. Why? Because it gratified his ego. He could go into meetings with Xi Jinping with a useful weapon. He doesn't like Xi's tie? He can raise tariffs tomorrow. He doesn't like Xi's joke? He imposes another unexpected tariff. Does this produce a better result than holding tariffs as a potential threat if good faith negotiations break down? I think not. But Trump likes to bully everyone and it fits his style. Now we have a price war on oil between Russian and Arabia. Who gets hurt? Well Europe and the US are already reeling from Covid-19. What the US doesn't need is yet another source of market uncertainty. Now we have a case in which collective action of the US, Britain, France, Italy and a few other countries makes sense. They could exact tariffs on Arabian and Russian oil to keep prices stable until the price war ends. Consumers in Europe and the US would suffer higher but stable oil prices in the short term. But it would also mean that oil companies like XOM, CVX, BP and RDS could avoid layoffs in the short term. In other words, a lessening of pain in an already stressed economic environment. But Trump has scuttled his relations with European leaders. So when tariffs might make sense, they are not discussed. The US had better options back in the days when the slogan was not "American First."

Mr. Kramer., Thank you for this clear and thorough discussion. The irony of our president's supposed allies sticking it to American oil companies is an example of how little diplomatic clout the USA has today. I wonder if things would have played out differently with Rex Tillerson at the helm. Probably not because our President only listens to himself. It really puts Mr. Trump between a rock and a hard p[lace. How can he introduce policies to increase the cost of oil to Americans during an election year. I doubt that would be a well received platform. On the other hand how does he win an election without winning the electoral vote rich State of Texas? On a different note I would really appreciate a similarly thoughtful article that helps explain the inter relationships and interests between Russia, Saudi Arabia, Turkey, the US and Iran regarding the mess in Syria.

Saudi Arabia slashes oil prices every so often, to drive out of business oil producers in places like the US and elsewhere. Then, after those have all been driven out of business, the Saudis raise prices again. Eventually, with oil prices high enough, oil producers start coming back into operation again in the US and elsewhere. Then, the Saudis slash oil prices again, and the cycle repeats itself. It's a calculated move which helps the Saudis, across the long term, maximize their profits and keep the world as dependent as possible on their oil, for as long as possible. Yet another good reason why the US, Europe and the rest of the world should move away from oil to sustainable energy sources.

"But shale oil and gas are expensive to produce, and Russia is now calculating that many companies cannot survive as prices fall below their break-even point." It doesn't matter if those companies fold and/or get bought out, the shale oil isn't going anywhere and if Saudi Arabia decides to close the tap and the price goes up again, somebody will be getting at that shale oil again.

The schism between the Saudis and Putin is just another reminder of the fragility of an oil-based economy. The faster that the US can convert its vehicles to electricity, the better.

The notion that the US will become a long term exporter of oil is a fallacy. The shale based reserves that has lead to a spike in US production is unsustainable because 1) The drilling, completion and fraccing costs are unusually high when amortized over the well production life. 2)The steep decline rates associated with production from these "tight" formations essentially require that two new wells be drilled for every increase in production from one well which is clearly unsustainable. 3) Capital inflows to this tight shale gig is quickly evaporating as debt levels spiral up.

As the US becomes an exporter of growing importance to world markets including China and Japan would it not be of amazing irony if American oil executives began back door negotiations with OPEC. If NATO could put a plug on Russian oil and gas imports while buying California Teslas the Ukrainians would gladly investigate the entire DNC. Fire up those reactors Germany!

Somebody in Russia does not understand market economics. It costs the original developer around $50/bbl to get shale oil in the US, but once that developer goes bankrupt and some bottomfeeder buys the assets, owner No. 2 can pump and make money at, say, $20/bbl -- as cheap as Saudi Arabia. So, no, US shale production will not drop as a result of Russia and Saudi Arabia torpedoing prices. (It will drop, slowly, because new development is stalling out as oil moved below $60.)

The lead picture alone is worth a couple of thousand words. Just glancing, I thought it was it was a cut from a new Austin Powers movie poster. Frightening villains, indeed.

Make no mistake this is NOT a war between the Saudis and Russia. This is an orchestrated push to do what they were not able to do in 2014. The key ingredient is no demand and too much oil that can be sold profitably or even to cover costs. Additionally the US producers are heavily leveraged and could be forced out of business. Is it a coincidence that prior to this push the Saudi Royal Family members who had a long history with the USA had been rounded up and detained? Think about it. With the Saudis saying they are having a price war with Russia rather than saying they are trying to drive our producers out of business we wish them well and cheer them on. We're being sucker punched and don't even realize it. There is a tectonic shift occurring in the Middle East and Russia is becoming the dominant player at our expense. Autocratic rulers have a tendency of gravitating to each other. That is now happening in the Middle East and other parts of the world too. Sadly, this is not the first time in history this has happened.

It's too late to do anything about shale oil production, the base infrastructure has been in place and it's really about ramping up/down production, which can be done relatively quickly. The Russians are grasping at straws here.

It is past time for America to adopt an energy policy that is focused upon renewable energy and takes America away from dependence upon such unscrupulous players as these two.

Very interesting.

It’s time for the United States to put a tariff on all foreign oil imports to penalize dumping by Russia and Saudi Arabia. The tariff should be at a level to ensure reasonable profitability of American shale producers.