Donald Trump has called himself a
“war-time” president, referring to his campaign as commander-in-chief against
coronavirus. In past days, he has taken on a new role as negotiator-in-chief
trying to end the oil-price war that is endangering U.S. shale producers and
hundreds of thousands of jobs.
This week’s result is an emergency,
virtual meeting of OPEC leaders with Russia, Canada and Mexico. It was delayed from
Monday until Thursday due to an ongoing Saudi-Moscow dispute about how to
address the biggest collapse in global demand and prices since the discovery of
the world’s first viable oil well in the mid-19th century.
What’s decided at that meeting will say
much about the limits to the leverage President Trump wields as the world’s
leading oil and gas producer and with two authoritarian leaders in whom he’s
invested so much – Russian President Vladimir Putin and Saudi Crown Prince
Mohammed bin Salman.
It was the bitter Riyadh-Moscow battle
for market share since early March that had prompted a record two-thirds
decline in oil prices to $21.65 per barrel, the lowest point since 2002. Yet Trump’s
intervention with both men last week, as described
to CNBC’s Joe Kiernan, had seemed to pay off.
Trump said that he expected OPEC and the
Russians to announce cuts of as much as 15 million barrels off the global total
of 100 million. Markets rallied on Thursday and Friday to their biggest
one-week gains ever of nearly 37% – only for investors to wake up this weekend
to continued Saudi-Russian sniping and the possibility of a renewed price
plunge this week.
What markets are missing in these
radical swings is that a greater power than these three alpha males – Trump,
Putin and MBS – is at work. They face the inescapable force of COVID-19, which
for weeks and perhaps months to come will depress the global economy. April
demand is thought to have dropped by more than 20 million barrels and perhaps by
as much as 30 million – a far greater sum than any cuts producers may announce
Never has the world experienced such a
double whammy of demand shock and supply surge. In the end, it could be limits
to global storage more than Trumpian intervention that shut off the spigots.
Get the Inflection Points newsletter
Subscribe to Frederick Kempe’s weekly Inflection Points column, which focuses on the global challenges facing the United States and how to best address them.
Writing in Foreign Affairs, Pulitzer
Prize-winning author and energy expert Daniel Yergin calculates
that “virtually every available gallon of storage space in the world will be
full by late April or early May. When
that happens, two things will result: prices will plummet and producers will
shut down wells because they cannot dispose of the oil.”
However this remarkable chapter in
energy history ends, it’s revealing to study what was behind President Trump’s
dramatic course reversal on how to approach the record decline of oil prices,
which he on March 31stcalled
“the greatest tax cut ever given” the American consumer.
Some factors behind this U-turn were the
persistent influence of 2020 electoral politics, the little-known role of
former Energy Secretary Rick Perry and a threat to a Saudi-owned Texas
refinery, and the lobbying power of the American energy industry (and some 2.5
million jobs it’s estimated to create).
President Trump began to reverse course
when confronted by aggressive lobbying by American oil companies and shale
producers that he should apply more pressure on his Russian and Saudi friends
to cut their production. His concerns grew further when confronted by the
potential impact of energy company bankruptcies on U.S. employment and his own
November electoral chances, particularly in Texas.
Most intriguing, as the Financial Times reported
Friday, a key individual behind the President’s apparent turn was former Texas
Governor Rick Perry, who was Trump’s energy secretary until the end of last
Though Perry had established good
relations with his Saudi partners, he advocated that the U.S. block Saudi crude
from reaching North America’s biggest refinery in Port Arthur, Texas, which is fully
owned by the Saudis.
Speaking to Fox News on March 31st
, Perry said
he would advise Trump to tell U.S.-based refineries to use only
American-produced crude for the next two to three months. That would send a
“clear message that we’re just not going to let foreign oil flow in here,”
Shale producers had been lobbying the
White House at the same time to suspend U.S. military aid to Saudi Arabia and
impose further sanctions on Russian energy until the new countries cut their
production. They also argued that the President should consider lifting some
existing Russian sanctions should Putin play ball and back off his campaign to
put them out of business.
However, it appears to have been the
threat to the Saudi refinery and to its overall relations with the United
States that got Riyadh’s attention. When confronted by the possibility that Putin
and the Saudi crown prince might not deliver on their production cuts this weekend,
Trump upped the ante on Saturday and said he would impose tariffs on oil
imports to “protect” U.S. energy workers from an oil price crash.
This would be a win for the smaller and
mid-sized producers versus the United States’ oil majors, who have opposed
At the same time, President Trump may
need to determine how he can deliver on Saudi demands for U.S. production cuts,
lacking any direct ability to influence American producers. The two likeliest
options would be a voluntary decision of the Railroad Commission of Texas,
which regulates the state’s oil and gas industry, or a shutdown of Gulf of
Mexico platforms and their 1.8 million barrels daily, using the threat of
coronavirus to their workers as the reasoning.
The uncomfortable fact for President
Trump is that despite his long-standing criticism of the OPEC and his support
for free energy markets, he needs the cartel’s market intervention to keep
shale producers afloat.
President Trump doesn’t have good options. He lacks easy leverage over the players, domestic and international, and he’s got even less control over the COVID —19 economic hit.
In the end, it is more likely that a U.S. government bailout will save the industry, rather than a global market intervention.
This article originally appeared on CNBC.com
Frederick Kempe is president and chief executive officer of the Atlantic Council. You can follow him on Twitter @FredKempe.
MUST-READS FROM A WORLD IN TRANSITION
This week’s must-read comes from Henry
Kissinger, who at age 96 delivers the most powerful mission statement for the
Atlantic Council and warning for the United States simultaneously.
“The historic challenge for leaders is
to manage the crisis while building the future,” he concludes. “Failure could
set the world on fire.”
Also, don’t miss former FT editor Lionel
Barber’s reflections on our changing world in the UK Spectator, Dan Yergin’s
brilliant guide to the oil price war in Foreign Affairs, and Ana Palacio’s
concerns about COVID-19 and democracy in Project Syndicate.
If you don’t think saving lives and the economy can be done at the same time, read Rajiv Shah and Paul Romer’s novel look at a different sort of testing from the Wall Street Journal.
#1. KISSINGER’S MUST-READ WARNING
The Coronavirus Pandemic Will Forever Alter the World Order
Henry A. Kissinger / WALL STREET JOURNAL
Speaking with a friend this week, I
said that the voice we most needed to hear right now was that of Henry
Kissinger. Then in the Saturday Wall Street Journal I found one of the most
significant statements he’s made in his 96 years.
Read every word, starting with his
time as a young infantryman during the Battle of the Bulge, but the two most
important paragraphs are the following:
“No country, not even the United
States, can in a purely national effort overcome the virus. Addressing the
necessities of the moment must ultimately be coupled with a global
collaborative vision and program. If we cannot do both in tandem, we will face
the worst of each.”
Building off this, he concludes with
“We went on from the Battle of the Bulge into a world of growing prosperity and enhanced human dignity. Now, we live an epochal period. The historic challenge for leaders is to manage the crisis while building the future. Failure could set the world on fire.” Read More →
#2. NOTHING WILL REMAIN THE SAME
How will the world be changed by the war against coronavirus?
Lionel Barber / THE SPECTATOR
It was good to
see my friend of many years, the former FT editor Lionel Barber, reflecting in
the UK’s Spectator on how “the world as we have known it for the past 40 years
has come to a stop.”
He raises the
provocative question: “Will March 2020 be remembered like the Great Crash of
1929 or the end of World War Two in 1945, events which catalyzed radical
changes in the way economies and societies were organized across the world.”
He considers the potential answers from the future of globalization and the European Union to the potential impact on America’s election and emerging markets. What’s clear: nothing will remain the same. Read More →
#3. “A MARKET OVERWHELMED”
The Oil Collapse
Daniel Yergin / FOREIGN AFFAIRS
Emerging-Market Petrostates Are About to Melt Down
Amy Myers Jaffe / FOREIGN AFFAIRS
If Henry Kissinger is the person to
whom one turns on threats to the global order, then Dan Yergin is my author of choice
in navigating the energy world.
“The global oil market has never in
history collapsed as precipitously as it has right now,” he writes in Foreign
Affairs, brilliantly guiding the reader through the events of the past weeks
that have landed us there.
“With much of the global economy at a standstill, the oil crisis is going to get worse in the weeks ahead,” he writes. “Some of that might be the result of the coronavirus infecting and disrupting operations in different parts of the world. Some if it might be the result of decisions by countries despite an era of fractious global politics. But the bulk of the decline will be the result of a market overwhelmed by the sheer fury of the coronavirus and the shutdown of the world economy.” Read More →
Also, don’t miss Amy Myers Jaffe, also in Foreign Affairs, dissecting the threat to emerging-market petrostates. Keep your eye on Ecuador, Iraq, Nigeria, and Mexico – and oil-linked debt woes that “could explode across the Middle East, Latin America, and Africa in 2020.” Read More →
#4. THE THREAT TO DEMOCRACY
Can Liberal Democracy Survive COVID-19?
Ana Palacio / PROJECT SYNDICATE
Former Spanish Foreign Minister Ana
Palacio, also an Atlantic Council board member, contributes to the urgently
needed conversation on how to defend democracy while conquering COVID-19.
“….the coming economic crisis will deepen doubts about western liberalism and weaken its position in the global contest of ideas that is currently underway,” she writes. “It is thus imperative that Western leaders not only limit the spread of COVID-19, but also foster social cohesion, devise a credible path back toward growth and normalcy, and reinvigorate the values and institutions that underpin liberal democratic societies.” Read More →
#5. NEW THINKING ON TESTING
Testing is Our Way Out
Paul Romer and Rajiv Shah / WALL STREET JOURNAL
Nobel Prize-winning economist Paul
Romer and Rockefeller Foundation President Rajiv Shah suggest a novel approach
to COVID-19 testing that could manage the virus in a more targeted manner and
thus avoid a depression.
“Two types of testing will be
essential,” they write. “The first test, which relies on a technology known as
the polymerase chain reaction, or PCR, can detect the virus even before a
person has symptoms. It is the best way to identify who is infected. The second
test looks not for the virus but for the antibodies that the immune system
produces to fight it…”
The authors argue that the two tests together will give policymakers the data to make smarter, faster decisions and better target efforts. Read More →
(They’ll speak on Wednesday at 11 am at an Atlantic Council virtual event, explaining their approach.)
PERSON OF THE WEEK
ATLANTIC COUNCIL TOP READS
Tue, Mar 31, 2020
European leaders are deciding the future of European power on the world stage. If Europeans can’t ensure solidarity with each other after so much pain and sacrifice, it will not only be a devastating loss for Europe. It will also be a blow to a world looking for the political shape of a post-coronavirus world.
Fri, Apr 3, 2020
As we contemplate the road back from the coronavirus depression, we need to think big and fix things, at home and abroad. We’re still going deeper into an American disaster. But American resilience can get us out of it.
Wed, Apr 1, 2020
In the present pandemic crisis, major countries have moved more quickly, offering more substantial monetary and fiscal support packages, including better targeted programs than in 2008-09. The challenge now is to quickly deliver the help to the weak entities which need liquidity the most. After all, any system is only as strong as its weakest link.