When elephants fight, the grass gets trampled. In the fight between Saudi Arabia and Russia, Alberta is the grass. .This week began with changing the clocks. There’s a full moon, and it ends on Friday the 13th. Oil producers and politicians from Oslo, to Caracas, to Calgary are feeling the bad luck. As the spreading Corona Virus deflated oil demand, Saudi Arabia decided to open the flood gates on production. This triggered a 30 per cent drop in oil prices Monday morning. Western Canada Select dropped nearly 20 per cent to $22.71 a barrel as West Texas Intermediate (WTI) fell to $32 a barrel..Saudi Arabia made this decision after talks among OPEC+ – aiming for a 1.5 million barrel per day reduction – broke down with Russia refusing to participate..There are a few reasons for the Russia- Riyadh stalemate. Since the 2014 price war – aimed at eliminating U.S. shale market share – failed, OPEC and its allies have cut production again and again to maintain price. OPEC production fell to a 17 year low. Russia believed this strategy was simply propping up US oil producers at the expense of everyone else. However, US shale production was already beginning to crumble, so it is hard to know how much this played a role..This isn’t the first time the Saudis expanded oil output in order to hurt Russia. When Saudi Arabia opened the floodgates in the 1980s, it helped lead to the Soviet collapse. The Syrian Civil War is ending and the Iranians and Russians are on the winning side, while the Saudis are not. The oil price drop is a parting economic shot at both the Russians and Iranians, simultaneously, reminding the rest of the world of the Saudis market dominance..It is quite possible that the Saudis overshot their mark. No one has perfect information regarding how much oil is being produced, consumed or stored at any given moment. It is also difficult to predict market reactions. It’s unlikely that the Saudis accurately predicted how their increase in production would impact price. One lesson from the 2014 price war was that the Saudis cannot sustain a low price for long. Although they require only $2.80 to get a barrel of oil from an existing Saudi Arabian Oil Co. fields, the price at which the country’s budget breaks even is $83.60 a barrel. They need the oil revenue to fund the bread and circuses which keep the house of Saud in power..Russia’s fiscal breakeven is $42 a barrel, but a price war will impact their foreign exchange reserves and lead to inflation which could impact Putin’s ability to hang onto the reins of power. It is unlikely that Russia will want a long price war either..It is hard to know who will say chicken first, but there is a third consideration and that is the U.S. . FILDEBRANDT: Rick Peterson moves to outflank rivals for Western votes at Calgary stop .The last time prices dropped so precipitously was the 1991 Gulf War. At that time, the U.S. welcomed a drop in oil prices as they were a consumer, not a big exporter. The situation today is different. The US has a big stake in the game and Americans need a price of $44-$55 to break even. It is unlikely that President Trump will allow this war to go on for too long before intervening. Given that neither Saudi Arabia or Russia will wish to continue the fight, there is a high probability they will use the excuse to stand down. Trump will be roundly condemned for his actions – as he always is – but it would be the best-case scenario for Canada. .Alberta needs a price of approximately $45 a barrel, and a long price war would utterly decimate an already struggling province. The repercussions would reverberate across Canada. The 2014 price war led to a Canada-wide recession and this time would likely be much worse. All Canadians should be hoping the bombastic leader to the south will get involved -sooner rather than later. .Tessa Littlejohn is a Columnist for the Western Standard .,.Twitter: @GTessam
When elephants fight, the grass gets trampled. In the fight between Saudi Arabia and Russia, Alberta is the grass. .This week began with changing the clocks. There’s a full moon, and it ends on Friday the 13th. Oil producers and politicians from Oslo, to Caracas, to Calgary are feeling the bad luck. As the spreading Corona Virus deflated oil demand, Saudi Arabia decided to open the flood gates on production. This triggered a 30 per cent drop in oil prices Monday morning. Western Canada Select dropped nearly 20 per cent to $22.71 a barrel as West Texas Intermediate (WTI) fell to $32 a barrel..Saudi Arabia made this decision after talks among OPEC+ – aiming for a 1.5 million barrel per day reduction – broke down with Russia refusing to participate..There are a few reasons for the Russia- Riyadh stalemate. Since the 2014 price war – aimed at eliminating U.S. shale market share – failed, OPEC and its allies have cut production again and again to maintain price. OPEC production fell to a 17 year low. Russia believed this strategy was simply propping up US oil producers at the expense of everyone else. However, US shale production was already beginning to crumble, so it is hard to know how much this played a role..This isn’t the first time the Saudis expanded oil output in order to hurt Russia. When Saudi Arabia opened the floodgates in the 1980s, it helped lead to the Soviet collapse. The Syrian Civil War is ending and the Iranians and Russians are on the winning side, while the Saudis are not. The oil price drop is a parting economic shot at both the Russians and Iranians, simultaneously, reminding the rest of the world of the Saudis market dominance..It is quite possible that the Saudis overshot their mark. No one has perfect information regarding how much oil is being produced, consumed or stored at any given moment. It is also difficult to predict market reactions. It’s unlikely that the Saudis accurately predicted how their increase in production would impact price. One lesson from the 2014 price war was that the Saudis cannot sustain a low price for long. Although they require only $2.80 to get a barrel of oil from an existing Saudi Arabian Oil Co. fields, the price at which the country’s budget breaks even is $83.60 a barrel. They need the oil revenue to fund the bread and circuses which keep the house of Saud in power..Russia’s fiscal breakeven is $42 a barrel, but a price war will impact their foreign exchange reserves and lead to inflation which could impact Putin’s ability to hang onto the reins of power. It is unlikely that Russia will want a long price war either..It is hard to know who will say chicken first, but there is a third consideration and that is the U.S. . FILDEBRANDT: Rick Peterson moves to outflank rivals for Western votes at Calgary stop .The last time prices dropped so precipitously was the 1991 Gulf War. At that time, the U.S. welcomed a drop in oil prices as they were a consumer, not a big exporter. The situation today is different. The US has a big stake in the game and Americans need a price of $44-$55 to break even. It is unlikely that President Trump will allow this war to go on for too long before intervening. Given that neither Saudi Arabia or Russia will wish to continue the fight, there is a high probability they will use the excuse to stand down. Trump will be roundly condemned for his actions – as he always is – but it would be the best-case scenario for Canada. .Alberta needs a price of approximately $45 a barrel, and a long price war would utterly decimate an already struggling province. The repercussions would reverberate across Canada. The 2014 price war led to a Canada-wide recession and this time would likely be much worse. All Canadians should be hoping the bombastic leader to the south will get involved -sooner rather than later. .Tessa Littlejohn is a Columnist for the Western Standard .,.Twitter: @GTessam
