There will always be those who see every crisis as an opportunity. Invariably, some of the opportunity-mongers misread the moment. The global coronavirus pandemic is no exception to this rule. And while the competition is stiff, Russia’s miscalculation might be the worst.
The Western world was only beginning to experience the depths of the current crisis on March 6, but the scope of what was about to engulf much of the planet was already visible. From Moscow’s perspective, the moment was ripe for a power play.
For years, Russia had endured downward pressure on oil prices as America’s capacity to produce and export fossil fuels increased amid the fracking revolution. Russia had long lobbied its fellow members of the expanded club of oil-producing nations dubbed OPEC+ to increase production, but it had encountered resistance from the Gulf States—most notably, Saudi Arabia. The Saudis had gone down this road before.
As the U.S. brought new wells online in the middle of the last decade, the Saudis rejected calls from smaller OPEC states to cut production. Instead, in the effort to throttle America’s emerging energy independence in its cradle, the Kingdom increased production. “It should be in the interest of OPEC to live with lower prices for a little while in order to slow down development projects in the United States,” said one petrochemical consultant at the time. That mission ended in failure for Riyadh. But the calculation for oil-producing states had changed by 2020.
By early March, the pandemic already had crushed global demand for oil, putting the squeeze on America’s extensively leveraged fracking industry. Forty-one smaller producers filed for Chapter 11 bankruptcy by 2019, and, with lockdowns in effect all over the country, insolvency loomed for many more producers. It was time to mete out a potentially fatal blow to America’s frackers.
Thus, Russia rejected calls to cut oil production and, instead, ramped up its capacity. OPEC states followed suit. Production limits were removed, and the Saudis began offering generous discounts on oil purchases to European and North American consumers. A supply glut exacerbated the global demand crunch. So much oil was being produced that, at one point, analysts weren’t sure if the world had enough on and offshore storage to hold it all.
For a time, it looked like the Russian gambit would pay off. On March 9, the first day of trading after the implosion of OPEC+, energy prices around the world collapsed by rates unseen for 30 years. Overstressed American drillers endured insurmountable pressure from their creditors as the U.S. benchmark price of crude fell to its lowest level in nearly two decades. Wells went offline around the country. Default rates were projected to increase dramatically. Smaller but critical producers began to fail, presaging a deluge of forthcoming bankruptcies.
But if the suffering visited on American producers was difficult, the collapse of the price of oil proved unendurable for Moscow. What Russia surely hoped would be a quick action that would force global producers to the table to etch out a more favorable production regime drew on for weeks. Russia, which had spent the last decade courting Middle Eastern states (including the Kingdom of Saudi Arabia), saw its regional influence wane as Riyadh flooded the market with cheap oil to compete with Russia. Revenues that Moscow derived from oil fell precipitously, forcing the Kremlin to increase its capacity to incur debt to 50 percent of GDP. In the space of just a few days, the Ruble lost 30 percent of its value. And as prices declined, Vladimir Putin saw his ambitious agenda (and the spending to which the Federation had already committed) melt away. With few palatable options left, Russia sued for peace.
Last Thursday, OPEC+ leaders arrived at a historic accord, effectively ending the oil war of 2020. Member states agreed to reduced capacity even as North America’s governments only made verbal assurances that they, too, would ease the pressure by gradually closing off the spigot. The White House announced on Sunday that the U.S. had also reached an even broader agreement with these and other combatants in this worldwide price war, but market forces more than North American governments are expected to pressure individual producers to scale back production.
The U.S. fracking industry is not out of the woods yet. Demand isn’t coming back anytime soon, and oil prices are expected to remain unsustainably low for the foreseeable future. American producers are shedding jobs, closing down rigs, and mothballing equipment in anticipation of a prolonged downturn. But the American fossil fuel industry survived, and Donald Trump’s engagement in the crisis cemented America’s role as a premier global oil-producer. What’s more, the terms of the peace that were imposed on Russia are far harsher than what Americans will endure.
A dispatch via Bloomberg News exposes the scale of Vladimir Putin’s defeat. Moscow will cut 2.5 million barrels of oil and petroleum products from the market—many times bigger than the production cap it balked at in March, inaugurating this conflict. Russian output for the first two months of this arrangement will decline to levels not seen since 2003. “This looks like a victory for the U.S., and Russia ends up a bigger loser than Saudi Arabia,” said Kremlin analyst Andrey Kortunov. Not to be outdone, Leonid Fedun, a billionaire shareholder in the Russian energy firm Lukoil, compared Moscow’s “humiliating and difficult” retreat to the Bolshevik’s unilateral withdrawal from the battlefields of World War I.
This was not the first time that legacy oil-producing nations have tried to kill off the nascent American fracking industry, and it will not be the last. But if they allow history to be a guide, the U.S. fossil fuel industry’s antagonists may conclude that the costs they will incur in that effort may just outweigh the rewards.
