The Problems with the Saudi-Russia Oil Agreement

Matt Snape

OPEC countries and Russia’s allies recently agreed in principle to cut their oil output by more than a fifth and said that they expected the US and other nations to join in their effort to prop up prices that have been shattered by the coronavirus pandemic.

This represents the biggest oil crisis in decades as reductions of 5 million barrels per day are expected to come from numerous nations. Global fuel demand has sunk by around 30 million barrels per day, or 30 percent of global supplies, as measures to tackle the virus have slashed vehicle usage, grounded planes and halted economic activity in general.

Trump Insists the US Oil Industry Should Not Suffer

US President Donald Trump held a call with Russian President Vladimir Putin and Saudi Crown Prince Mohammed bin Salman of Saudi Arabia in order to ensure that the US oil industry would not suffer as a result of this deal. Trump has gone as far as threatening Riyadh with tariffs if the Saudis did not cut enough oil to help America. The cuts to oil production are likely to be gradual due to US resistance.

However, there is one crucial reason as to why many countries continue to struggle to cut their output- there is no global body that all oil producing nations are a member of. Instead there are rival organizations like OPEC and a bloc of nations led by Russia. The US is not a member of OPEC, which means that they cannot have an effective dialogue with other producers. Also, each country will always exercise its own self-interest when they attempt to form a deal on this issue, as shown by Trump’s insistence that the US oil industry does not suffer.

The Saudi-Russia-US Deal Has Major Problems

The US federal government has no sovereignty over oil production either. In theory, states such as Texas and Oklahoma have the authority to slash production. The case of the Texas Railroad Commission serves as a good example of when a body imposes quotas on companies that oppose them. Quotas are complicated because they can lead to price controls and other unwelcome state interventions that could be used as a basis for restrictions on production.

State efforts to cut oil production also show that politicians have a lack of faith in markets. American oil companies will embark upon this path whether the federal government requires it or not. As the weakest companies with substantial debts collapse, shale oil resources are likely to become more attractive to help stabilize any market imbalances. The long-term result will be a stronger shale industry.

US policymakers should also look at ways their country can reduce its long-term dependence on fuel so that America is not vulnerable to unavoidable cycles regarding oil prices.

It’s Time for a Stable Global Oil Market

As Bloomberg‘s Christof Ruehl argues, a Saudi-US-Russia oil deal is not a good idea full stop. Neither is allowing OPEC and OPEC+ to interfere in the oil market, as all they do is raise prices. The international oil market needs to be more stable.

A global oil market should emerge whereby Gulf countries would be allowed to sell whatever quantity of oil they desire. A mix of global companies would be next, which could be tilted in favor of Russian producers with low production costs. Unconventional companies would produce the residual, and the cost at which they are capable of doing so would set the global price of oil.

State interference in the global oil industry never works. These types of deals are an opportunity for countries to flex their muscles and exercise their own selfish interests. It is time to pave the way for an oil market that allows for prices to respond to global circumstances and for the US in particular to end its vulnerability to falling oil prices.