Sen. John Barrasso joined several U.S. officials in drafting a letter to Saudi Arabia’s crown prince, urging him to stabilize increasingly volatile global oil markets.
Sent to Saudi Crown Prince Mohammed bin Salman on Tuesday, the letter referenced the coronavirus pandemic and depressed oil prices caused by Saudi Arabia’s current spat with Russian producers. The dispute over oil has hit the U.S., the world’s leading shale producer, particularly hard. A copy of the letter was obtained by the Star-Tribune.
“Senior Saudi government leaders have repeatedly told American officials, including us, that the Kingdom of Saudi Arabia is a force for stability in global markets,” the letter stated. “Recent Saudi actions have called this role into question. We urge the Kingdom to assert constructive leadership in stabilizing the world economy by calming economic anxiety in the oil and gas sector at a time when countries around the world are addressing the pandemic.”
The fall in oil prices has been of particular concern for Wyoming policymakers who, earlier this month, were informed that for every dollar drop in the price of oil, the state loses roughly $12 million in revenues.
Over the past several weeks, the price has dropped precipitously. Brent Crude, an international benchmark for oil prices, reached below $27 a barrel Wednesday. That’s down from over $67 per barrel at the beginning of this year.
If sustained, the impacts of a price war on Wyoming’s budget could be even worse, the state’s budget director Don Richards told state lawmakers in a presentation on the budget March 9.
“It could be even worse — and I don’t mean to gloom-and-doom — but we haven’t taken into account sales tax,” he said at the time. “Are we going to see a hit on tourism this summer, are we going to see substantially less pipe being purchased in the oil patch for the next year, two years? These are all additive hits.”
As a leading oil producer, Saudi Arabia advised OPEC to cut back on oil production by 1.5 million barrels per day in early March in its initial attempt to help global oil markets rebound from the COVID-19 outbreak. Cutting the supply of oil can sometimes help buoy prices.
But Russia, the third-largest producer of oil, did not agree to OPEC’s plan to curb production. (Russia is not a member of the organization.) In response, Saudi Arabia, which had previously seen its relationship warming with Russia, slashed oil prices and ramped up oil production instead. The two countries continue to joust, with Saudi Arabia vowing to keep up its oil production.
What’s more, a production agreement between OPEC and other big oil producers will expire April 1. If members decline to extend it, countries won’t be required to make output cuts.
The collateral damage from this dispute has largely landed on the doorsteps of American shale producers, especially independent ones, many unable to continue drilling when oil prices have plunged too low.
“The demand destruction resulting from the coronavirus combined with Saudi Arabia and Russia increasing supply has left global energy markets in unchartered territory,” Chief Economist Dean Foreman with the American Petroleum Institute said in a statement Thursday.
Those impacts were likely intentional, energy expert Randolph Bell wrote in a blog post last week. Bell is the director of the Atlantic Council’s Global Energy Center, a nonpartisan think tank focused on international energy security.
The move may have been in part an effort to punish U.S. shale producers over U.S. sanctions on Russia’s Nord Stream 2 pipeline into eastern Europe (sanctions that Barrasso played a leading role in passing). In addition, looming U.S. sanctions on the Russian drilling firm Rosneft, which has sped up operations in Venezuela against the wishes of President Donald Trump, could also be at play in the conflict over oil.
Russia’s economy has faced increasing challenges amid slow growth, and now lagging oil prices, that has contributed to a lagging gross domestic product. This could be the country’s weakness as the price war continues, Bell said during an Atlantic Council press call last week.
“I think this is the fact that would really disturb (president Vladimir) Putin eventually,” he said of the potential decline in GDP. “But it will take time.”
University of Wyoming economist Chuck Mason recommended taking the geopolitical tit-for-tat between Russia and Saudi Arabia with a grain of salt, though.
“I think Saudi Arabia and Russia are not nearly as important in crude markets as we would like to think they are,” Mason told the Star-Tribune on Monday. “There are lots of other sources of supply.”
What the price drop does make clear is that demand for crude has a heavy hand in shaping international oil markets.
“Right now this is kind of a scary time for people, who in the end are the users of petroleum products,” he added. “When people get scared they hunker down.”
Meanwhile, Congress and the Trump administration have worked to mitigate the worst impacts on U.S. producers, including a potential bailout for shale producers tied to coronavirus relief.
Trump has also been eyeing a large-scale purchase of 77 million barrels of oil to fill the nation’s Strategic Petroleum Reserve in an effort to raise prices.
While the Oval Office has insisted it can do so without congressional approval, the $2.5 billion needed to make the purchase would need to be appropriated from somewhere — a move only Congress can make.
In the meantime, Barrasso and his Republican colleagues have been trying to resolve the issue politically, through Saudi Arabia.
In an interview Wednesday, Barrasso told the Star-Tribune he had a conference call earlier in the day with the Saudi Arabian ambassador to the United States, Princess Reema bint Bandar Al Saud, “laying it on the line,” in regards to the current price war’s impact on American producers.
“The ambassador has seen the letter, and now the crown prince has seen it,” he told the Star-Tribune on Wednesday afternoon. “We have their attention, and now it’s time for action.”
Follow the latest on Wyoming’s energy industry at @camillereports