Oil prices

OPEC and Russia Agree To Cut Oil Production To Boost Prices

U.S. and Canada are supposed to agree to cut 5 million barrels

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The Saudis and Russians have reportedly agreed to cut their petroleum production by 3.3 million and 2 million barrels per day, respectively, in a bid to shore up global oil prices. Other members of the Organization of Petroleum Exporting Countries (OPEC) are supposed to cut an additional 5 million barrels by next month.

Owing to the free fall in the price of crude oil in the wake of the global COVID-19 pandemic, the price of regular gasoline at the pump in the U.S. now averages under $2 per gallon. My wife (using her Kroger points) just purchased premium gasoline at $1.40 per gallon.

"Good for the consumer, gasoline prices coming down!," tweeted President Trump on March 9. Just the day before, Saudi Arabia launched an oil price war against Russia because President Vladimir Putin refused to cut back his country's production. By then rising global supplies had already pushed the price of benchmark WTI oil down from $63.05 per barrel at the end of 2019 to just over $40 at the beginning of March. Toward the end of the month, the price of WTI oil had dropped to $21.50 per barrel before bouncing back to just over $26 now.

Of course, driving is way down as a result of pandemic lockdowns. In fact, vehicle miles traveled were down in March about 70 percent in major U.S. cities.

The oil consultancy IHS Market projects that the economic retrenchment in response to the coronavirus pandemic lockdowns will reduce global oil demand in the second quarter of 2020 by 16.4 million barrels per day, and that the decline in April steepened to 20 million barrels per day. The world was recently producing 100 million barrels per day, so that much of a decrease in demand roughly means that there are 20 million barrels per day in excess capacity.

No longer touting lower gasoline prices, Trump has instead begged the Saudis and Russians to cut their oil production. On April 2, the president tweeted: "Just spoke to my friend MBS (Crown Prince) of Saudi Arabia, who spoke with President Putin of Russia, & I expect & hope that they will be cutting back approximately 10 Million Barrels, and maybe substantially more which, if it happens, will be GREAT for the oil & gas industry!" He further tweeted: "Could be as high as 15 Million Barrels. Good (GREAT) news for everyone!" Everyone except American drivers and anyone else who uses petroleum products.

The next day, the Russian government denied that Putin had actually spoken with Trump's murderous friend Mohammed bin Salman. At that point, the president shifted from begging to threatening tariffs.

"I am a big believer in our great energy business, and we're going to take care of our energy business," Trump said during a Saturday press briefing. "If I have to do tariffs on oil coming from outside, or if I have to do something to protect—or thousands and tens of thousands of energy workers, and our great companies that produce all these jobs—I'll do whatever I have to do," he added.

Trump has denied that OPEC and Russia are demanding comparable cuts in the U.S. oil production. With respect to cutting domestic production, the president, much to his credit, said, "I think the cuts are automatic if you are a believer in markets."

In other words, Trump proposed imposing a tax that will end up increasing the price of gasoline for American consumers. Why? Because of the bigger role that energy companies are playing in the economy as the U.S. last year became the world's largest oil producer at 12.8 million barrels per day. As oil prices fell, the domestic industry began to shrink while layoffs swelled.

Trump has clearly calculated that paying less at the pump is no longer a vote-getter. Instead, the president is worried about the effect of the loss of tens of thousands of oil industry jobs on his re-election chances as higher cost U.S. oil production loses out to cheaper imported oil.

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  1. My wife (using her Kroger points) just purchased premium gasoline at $1.40 per gallon.

    Weird flex but okay.

  2. So when Trump talks to people he is Begging? or maybe it was the threat of a Tariff. I looked at the linked article where did he say he begged? Good Grief normally Bailey is fairly level headed but I guess Trump has infected everyone.

    I think let them pump all the gas they want to make it cheap for us and when they run out, ours will be worth far more.

    1. “Bailey is fairly level headed but I guess Trump has infected everyone”
      The same thing happens with Robby. The peer pressure on these guys is enormous though, so if it’s just hyperbole and they aren’t outright lying or making shit up, we can cut them slack.
      Only Stossel and Volk seem truly immune.

      On the other hand, ENB, Boehm, Binion, Dalmia, KMW and Suderman do outright lie and make shit up on a regular basis, blatantly, and should have been fired for it long ago.

  3. They’ll sell half as much but at twice the price!

    1. Selling twice as much for half the price worked for Crazy Eddie.

      At least until it didn’t.

      1. loved those spots. in-SAAAAANE!

        1. And he would have gotten away with it. His biggest mistake was fleeing to a country with an extradition agreement.

        2. And Krass Brothers had the greatest worst commercials of all time.

          1. store of the stars!

  4. i dunno i’m enjoying my premium @$2.12 especially since i’m burning a ton driving 85 mph all over Dallas

  5. Yes jobs are a bigger thing for voters than the price of gasoline.

    Average salary is $50,000 per year. Average spending on gasoline is $3,000 a year. One tips the scales more than the other.

    Brilliant analysis.

    1. How many miles and what mpg do you get?

      Vehicles in recent model years average about 25 mpg. At $2 per gallon, $3000 buys 1500 gallons, and translates into 37,500 miles.

      But cars and light trucks average less than 12,000 miles per year. So even at 15 mpg, a driver will spend only $1600 per year. Bumping the pump price by 25% means an extra $8 per week.

      A pretty easy political sell for political feelings.

  6. Hopefully, with farmers, construction workers, auto workers and retail workers being jobless and supplies shrinking drastically, Americans will soon be able to pay twice as much for food, housing, cars, and clothing and won’t that be a glorious day! I can’t wait until I can brag about my hundred dollar socks and my 50 dollar lunches and my 20 dollar a roll toilet paper! Bring on the higher prices, higher prices are better for everybody! Just as a thought experiment, can you imagine the horrors we would experience if self-replicating robots were capable of producing everything we wanted for free and the price of everything dropped to zero?

    1. This is the best Jerrykids don’t you see, it’s good for the lobbyists that take my congressman and senator out to lunch everyday. If it’s good enough for them it’s good enough for us all.

  7. “Everyone except American drivers and anyone else who uses petroleum products.”

    I’d welcome low gas prices a whole lot more if I could go anywhere but the grocery store, which is less than half a mile from home.

  8. Trump, in my view, properly assessed that free falling oil prices were a threat to an essential part of the US economy that outweighed the value of cheap gas to consumers who are prohibited from leaving their homes anyway. To claim that the only reason he did this is to cynically enhance his reelection prospects is a pretty long leap. Ron has been one of the last Reason writers who has been even worth reading since Orange man upset the apple cart. I know that TDS is a helluva drug but shame on you Ron.

    1. And we’re talking like 10-25 cents/gallon.
      That’s like an extra $5/tank max

      1. Let’s say I drive 25,000 miles in a year.
        Let’s say my tank holds 15 gallons, and I refill every 300 miles.
        So I’ll fill up about 83 times in a year.
        Let’s say I pay $0.50 extra per gallon.
        .5×15×83=$622.50 more/year
        Not that bad

        1. I like cheap gas as much as the last guy but when I filled my tank at 60 cents a gallon less than I had 2 weeks before I was not smiling. When a commodity gets too cheap to profitably produce it either disappears or gets a whole lot more costly as competitors are driven from the market. It’s a problem I’ve always had with Reason style libertarianism. Cheap consumer shit is always good whatever the cost. The bottom line is that only labor creates wealth and even big time pundits like Ron Bailey don’t get paid until some guy somewhere in steel toed boots drills a fucking hole somewhere. We may be on the our way to an unprecedented economic black hole. Government has not just suspended civil rights and seized the means of production like a Stalinist, Maoist or Venezuelan nightmare. They have created a police state and are destroying the means of production. But Ron would rather worry about Trump’s reelection strategy. He beclowns himself by writing this shit.

    2. Should we also be worried about how the falling price of oysters will affect an essential part of Reason commentariat economy: pearl clutching?

      1. Didn’t slow you down any.

    3. “I am a big believer in our great energy business, and we’re going to take care of our energy business,”

      I disagree with Trump on this one. The “energy business” will be fine when demand comes back, despite *investors* taking it in the shorts now.

      Chapter 11 bankruptcy reorganizations preserve the economic function of the energy business w/o bailing out investors, which I see no reason to do.

  9. “I think the cuts are automatic if you are a believer in markets.”
    Of course the market will solve this huge drop off in demand. Leave it in the ground because oil producers are soon to run out of above ground storage space.

  10. How can the US agree to cut production? How does that work? These are privately owned mineral rights, are they not?

    1. Excellent question. And the article even states Trump’s denial that the US has agreed to cut production.

      And yet the headline still claims the US is supposed to agree to cut production. Journalism much, Reason?

      1. Texas Railroad Commission – look it up.

        1. No Ron how about you do your fucking job instead.

          1. Even I knew about the TX RR Commies.

    2. #LockeanProviso

  11. So a few of the roughnecks in an already very small workforce of the oil refining industry in America lose their jobs. I’m ok with that, just give me my cheap fuel so i can drive my big 4×4 truck more than just twice a week. There, someone had to say it!

  12. Mr. Bailey, I generally like your articles but seriously, your attempt to be a ‘Trump whisperer’ Trump has clearly calculated that paying less at the pump is no longer a vote-getter. Instead, the president is worried about the effect of the loss of tens of thousands of oil industry jobs on his re-election chances as higher cost U.S. oil production loses out to cheaper imported oil. just sucks. You don’t know jack-shit on what POTUS Trump is thinking. Does anyone? 🙂

    The US will get along just fine? Why? Because we have better people, and a better system than anyone in OPEC. I personally have no problem putting the squeeze on all of those OPEC assholes. I remember 1973-74. My message to OPEC: Our turn….bitch.

  13. So many reasons to hate Trump. God damn that pos.

    1. Pod, you really need to chill. It is all good. POTUS Trump will defeat brain-damaged Biden in November, and appoint another 25% of the Federal judiciary. And probably cut your taxes. And send Pelosi packing.

      Don’t worry…be happy. 🙂

  14. High energy/gas prices is exactly what this nation needs with tens of millions unemployed.

    1. I know that this is a waste of time, but I will try to talk sense to the Reasonoid crowd.

      In a world free market, which oil production is not. increased production by a firm, or even a few firms would immediately balanced by reductions in production from the others and the market would continue to price based on production costs.

      However, as you might suspect based on the existence of OPEC, we do not have a worldwide free market. In the US we have dozens of larger firms and perhaps a hundred smaller firms all producing oil. Investments in traditional oil production are large and production rates do not change quickly. Fracking is better, but still production rates to return the cost of development need to remain somewhat stable for a year or so.

      Sovereign oil producers, Russia and Saud are just the biggest, have the ability to tolerate long term losses to drive smaller competitors out of the market. In our current case, Russia and Saud are fighting it out because Russia refused to “play nice” with OPEC. If this were a free market and this oil was being produced by private companies, this would not take place because they would have already cut production due to reduced or negative margins.

      Private firms such as those in our oil industry can’t take these sustained loses since they, unlike Russian and Saud, can’t just wack the head off any investor that doesn’t like not getting paid. Trump is concerned that the Sovereign oil producers will bankrupt all our domestic firms leaving us were fewer producers, and after the bloodletting by the sovereign producers, higher prices for a long time before the markets can readjust.

      This is the problem with most of the simplistic pablum produced by Reason, it fails to consider that while we may have (and should) have a free market within the US, on a global basis we are faced with state actors that often have different agendas than private companies do. There is no way, in our current world, to have truly free markets. Thank goodness the adult in the White House knows this.

      1. So what you’re saying is that you’re retarded and don’t know the first damn thing about economics or the oil industry? OPEC’s been around about 50 years now, if they haven’t managed to run all the small independent oil producers out of business yet they’re really bad at this. And you know when oil companies go out of business, the oil fields and the oil rigs and the oil refineries don’t just disappear, right? The oil business regularly goes through these boom and bust cycles because you don’t produce oil a gallon at a time – when prices are high it makes sense to invest in exploring for new oil fields but when you find one there’s suddenly millions or tens of millions of barrels of new supply on the market and the price craters. So the marginal high-cost producers mothball their stock until the price comes back up to where it’s economically feasible to start producing again. It’s happened over and over and over again in the oil business. It’s how supply and demand works.

        If you’re going to argue that we should be willing to be forced to pay a little higher price for the sake of the jobs, well, congratulations! You’ve just joined Bernie Sanders and the #FightForFifteen crowd. It’s the exact same argument they use – if McDonalds would only raise the price of a Big Mac by a nickel, they could afford to pay their workers a living wage. Get the fuck outta here with that shit.

  15. I tried to say all of that above but you said it better.

  16. Thank god for cartels, right?

    /sarc

  17. Ron, if you’re interested in Oil (and geopolitics), you should follow Peter Zeihan.

    He’s predicting a full price collapse on oil. The rout has just begun.

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