Theoretically, Russia could put the screws to Washington simply by controlling oil prices. If Russia started pumping oil as fast as it could, this would drive down the oil price to below the limit required by the US shale oil operators that Trump is counting on to make America great again for the zillionth time (I’ve lost count of all the times it was great again before). It could pretty much wreck the US economy.
Although this would be bad for the Russian economy as well, the difference is that the US shale drillers need a sale price in the range of $50 per barrel on average, taking new well exploration and drilling into account, whereas Russia can get by on much less. I have idly wondered if this is not the reason Russia has chosen to be the plus at the end of OPEC+ rather than a full-fledged member. At any rate, Russia has turned down an offer by Saudi Arabia to head the organization and has made it clear it does not want to be tied into decisions made by its Middle Eastern friends in OPEC.
Investopedia explains the situation that would give Russia the power to put the screws to the US oil companies:
“According to Reuters, estimates put the break-even point for fracking at around $50 per barrel, but other estimates put it as low as $30 per barrel.” The $30 figure applies only to wells that are already up and running but discounts the costs of exploration and drilling new wells. But shale drillers do a lot of exploration and drilling and that is what eats up their cash.
“At less than a price point around $50 per barrel, oil and gas companies are less likely to explore and drill for new oil accessible through fracking, but existing operations may still be cash-flow positive.”
A look at the costs of producing Russian oil vs US shale oil shows that Russia could afford, in the short term, to pump more and hence lower its price without seriously hurting its economy.
According to this chart for 2016, the cost of pumping Russian onshore crude (non-shale) is $19.21 vs US shale, which is listed as $23.35 but with exploration and drilling costs subtracted. However, the Russian price is almost one-half (43.9%) taxes while the US shale price is only about one-quarter taxes, so if Russia wanted to drop the price badly enough just to pressure the US (for example, to stop toying with war on Iran), there is plenty of wiggle room. For example, if the Russians dropped to one-quarter tax as against cost, it would be able to sell for less and thereby doom the US companies. In fact, since the Reuters estimate is a break-even point of $50 for shale on average, including new drilling and exploration costs, the Russians could easily put US oil out of business in short order and then go back to a higher price once the damage to the US was permanent.
However, back in the real world, Russia is actually trying to get the best possible prices and it would take a huge political crisis to induce it to lower the price enough to threaten US oil companies.
Of course, a world war is about the biggest crisis anyone can imagine, and that is what the US is toying with at this moment, so who knows what Russia might do to pressure the US into behaving more sanely?
It seems unlikely, however, that the Kremlin would need to do much more to hurt the US oil business than what the US is doing to itself.
I showed in Oct 2018 why shale oil probably will never be profitable from a scientific and technological standpoint. Namely, the wells are nearly depleted after 2-3 years and new ones need to be located by exploration and drilled. There is no way this expensive operation can be made anywhere near as cheap as oil and gas extraction from conventional fields that do not require fracking and last several times that long. However, science means nothing to Washington and Wall Street, which is why they have accrued an unpayable debt, keep blowing money on wars and arms they don’t need, and act as if nothing could possibly go wrong.
By January of the next year se were able to report on the fulfilment of our October foreshadowing of a bust in the shale oil industry.
In that article cum translation, the Russian author, based on US reports, had stated:
“Meanwhile, according to a study by The Wall Street Journal, shale drillers are still lagging in productivity. After analysing about 16,000 wells in Texas and North Dakota, the publication came to the conclusion: the largest American companies produce significantly less shale oil and gas than they promised investors. Thus, the profitability of developing hydrocarbon reserves using the method of hydraulic fracturing was very much in question.” [my highlighting]
I recently wrote on Quora, based on the alarming kind of reports cited above, that the economic figures touted by Trump as his crowning achievement are not really indicative of a lasting trend, not even close. I redacted the Quora piece into the article published here. The problem is, writing anything negative about Trump’s wonderfulness on Quora brings out angry blowback from some of his many acolytes. I was told by one zealous supporter that since I only had written negatives about Trump’s economy, I was definitely bought and paid for by someone who was out to get him. I wonder who that would be and when my check will arrive.
The trouble is that too many Americans want the news media to be a cheering section, not a sober and objective transmitter of actual news.
But let me explain in objective terms why his positive economic results are not an indication of a lasting trend, not even close.
Experts like the ones cited above, from mainstream sites like oilprice.com and WSJ, for example, are showing with statistics (and not with figures that I made up out of spite) why the “new jobs” that Trump claims to be creating are illusory.
Just a few years ago, not a few economists were saying that the new jobs in the Trump administration were due mostly to shale oil.
A fairly recent glowing report from Forbes:
“With all-time records being set for total Americans in the labour force, energy continues to outpace the other sectors in terms of new hires.”
“Our shale revolution is revitalizing the U.S. economy and making us more competitive in the global marketplace.”
Well, if shale is leading the way, then the US is in for trouble.
Almost no one (except perhaps Mr. Forbes) is seeing a rosy future for shale oil at this point. The expert group Institute for Energy Economics and Financial Analysis (IEEFA) (which has scientists, not politicians, on its staff) reported:
“Stock prices of all 29 shale producers fell in 2018, pressured by volatile crude prices and stronger returns in other sectors. Only one of the 29, Cabot Oil & Gas Corp, traded higher at the end of 2018 than it did two years earlier.
“An investor who put $100 into the S&P 500 Oil & Gas Exploration & Production Index in 2013 would have had $58.99 at the end of 2018. Similar $100 investments were worth just $9 in Whiting Petroleum Corp, $33.51 in Apache and $38.88 in Devon, according to financial filings. By contrast, $100 in the S&P 500 grew to $150.33 over the same period.”
There is another analysis based on a WSJ report showing that new shale wells were consistently yielding significantly less than the oil experts had predicted, costing major oil companies to haemorrhage money. This is what happens when investors, politicians and media base their expectations on irrational beliefs related to their feelings about their favourite politicians and ideologies, instead of looking at the facts through scientific eyeglasses. This is the mentality that make true believers angry at people who report the facts without the rose coloured glasses.
But after all, if the US is taking a course leading to hell, shouldn’t Americans have enough objective reliable facts to change course before they get there, rather than on arrival?