There’s a Nasty Oil Price Spill That’s Spreading Faster Than Covid-19
By Kim Iskyan
“It’s like magic,” my Armenian friend Tigran said to me from Yerevan yesterday morning. “We look where they want us to look.”
Like many people from the former Soviet Union – the birthplace of fake news, back when it was called “propaganda” – Tigran has a healthy respect for conspiracy theories and sleight of hand.
And what’s really going on in the world… What really matters while most folks are busy thinking of new 20-second ditties to hum while washing their hands… is oil.
As of last week, a barrel of one of the essential inputs of modern civilization costs less than half of what you’d pay for a same-sized fix of Coca-Cola Cherry Zero.
As political risk media company GZERO Media explained earlier this week…
For three years, Russia and Saudi Arabia, the world’s two largest oil exporters, had a deal to prop up global crude prices by limiting production. They calculated that by producing fewer barrels, rising prices would make each barrel worth more.
Over the weekend, that deal collapsed when Russia backed out, allegedly because it decided that higher prices were also providing an unexpectedly large boost for the U.S. oil industry, which has expanded its market share by increasing production by nearly 50% since the Russia-Saudi (formally, Russia-OPEC) deal began in late 2016. A lot of that increase has come from U.S. shale oil.
Saudi Arabia, eager to show Russia that its market power is not to be ignored, slashed the price at which it sells its own oil and moved to sharply boost production. The expected flood of new Saudi supply dropped global oil prices by more than 30% on Monday, the biggest overnight drop in almost three decades.
The price of oil was already under pressure because closed factories, crippled supply chains, and people FaceTiming instead of flying and shaking hands (thanks, COVID-19) meant less demand for oil. More supply and less demand means a (much) lower price.
But wall-to-wall COVID-19 news is making us look away from what might be – in economic, market, and geopolitical terms – the much bigger story of an oil-price crash…
Here in America, as Donald Trump famously – and correctly – pointed out back in November 2018, a lower oil price is like a tax cut. You pay less to drive your Jeep Grand Cherokee Trackhawk (13 miles per gallon).
But there’s another side to it, too. Thanks to higher production of shale oil, the U.S. produced twice as much oil in 2018 compared to 2011 – and more than either Russia or Saudi Arabia. The problem with shale oil is that it’s expensive to get out of the ground… And at a lower oil price, a lot more shale oil producers will be gushing even more red ink than they already were.
That’s bad news for the people who work for those companies… the banks that lent money to shale oil producers… investors in those banks and companies… and the economies of the cities and states where shale oil producers are an important source of jobs and tax revenue.
Saudi Arabia, in turn, is happy to show Russia who’s boss… and put those pesky American shale oil producers out to pasture. But it comes at a steep cost, since Saudi Arabia is now making a lot less money from its main resource.
There’s also the problem of state oil-producer Aramco, which in December sold a 1.5% stake for $25.6 billion in what was the world’s biggest IPO. To help get that deal out the door, nearly 5 million Saudis – of a population of 33 million – bought shares in the deal. But with the decline in the oil price, Aramco shares are now trading at 9% under the IPO price… and falling. That’s going to make a lot of dumb-money Saudi investors very unhappy, which is bad news for Saudi leader Crown Prince Mohammed bin Salman.
Meanwhile, Russia has an economy that’s addicted to hydrocarbons – where over the past few decades a collapse in the price of oil has crashed the economy.
My hedge fund I was running was collateral damage in the 2008 oil-price collapse during the global economic crisis – when the Russian stock market fell 85% and the economy contracted almost 8%.
Russians are used to a good crisis… And this one won’t be a surprise.
But here in the U.S., most of this happened while you were sleeping. A few days ago, under the cover of the oil-price crash, Vladimir Putin and the Russian parliament endorsed plans to lift or lengthen term limits so he can stay in power as Russia’s president as long as he wants. (“Everyone knew it was coming,” my friend Tigran said to me.)
Another big loser of a lower oil price is Nigeria, Africa’s biggest economy. There, oil accounts for around 6% of GDP and 90% of export revenues. Perpetually unstable, Nigeria – with 190 million people – is the biggest country that no one wants to think about what might happen if it implodes. And now the likelihood that it will is a whole lot higher.
Finally, Venezuela is often overlooked as the country with the world’s biggest oil reserves. It’s barely getting by – and the only way it does is thanks to oil revenues. With those in free-fall, pressure for political change in Venezuela (and the flow of migrants into Colombia and elsewhere) is going to increase sharply.
However, it’s not all losers in oil…
This morning, I rode over to the beach close to where I live here in Singapore. All across the horizon were enormous oil tankers…
Over the past few days, the cost of renting a very large crude carrier (“VLCC,” as they say in the industry) has spiked around 30%. That’s because after the collapse in the price of oil, big oil traders want to keep their product off the market – in anticipation of prices rising – rather than sell it.
Right now, renting one of those floating Molotov cocktails for a day – with enough space to store 127 Olympic swimming pools-worth of oil – will set you back around $38,000. It was less than half of that a month ago.
One of my favorite quotes is from former U.S. defense secretary Donald Rumsfeld… “There are known knowns. These are things we know that we know. There are known unknowns. That is to say, there are things that we know we don’t know. But there are also unknown unknowns. There are things we don’t know we don’t know.”
All of those unknowns are what’s the problem just now.
The answer to those unknowns? Another of my favorite politician quotes is from Viktor Chernomyrdin, who was Russia’s prime minister during much of the 1990s. “We wanted the best, but it turned out like always.” (It sounds better in Russian: Хотели как лучше, а получилось как всегда.)
The danger now is that the unknowns turn out… like always.
The Secret to Singapore’s Success
As I mentioned a month ago Singapore had the second-most cases of coronavirus of any country. Now it has dropped to No. 20. No one in Singapore has died of coronavirus.
COVID-19 has been a lot easier to get under control here because the entire country of Singapore is only a bit bigger than Columbus, Ohio. It has as many people as the Washington, D.C. metropolitan area. That it’s so small makes it a lot easier to control.
Along those lines, it helps that Singapore is an authoritarian state. Don’t get me wrong, it’s a Disney-fied steel boot… But it’s a hard and unforgiving boot nevertheless. When Singapore says “jump,” the only question is how high you jump. That’s useful in a time of crisis.
Also, it’s rich… which means that Singapore has the resources to protect its people and implement measures that wouldn’t be economically feasible in poorer countries.
But maybe most important, Singapore’s government is extremely competent. Government ministers are paid like CEOs, and government employees at every level are compensated well. People here aspire to work for the government (“It’s good enough for government work” isn’t an expression that people use here). So most government policies are data driven, thoughtful, and carefully implemented.
For example… during the height of the mini-panic here in Singapore in early February, the country’s prime minister, Lee Hsien Loong, released a message (see it here) that’s reassuring and measured and hits all the right notes. What’s more, the prime minister made similar statements in three languages… English, Malay, and Mandarin. Forgivably, he doesn’t speak Tamil, Singapore’s fourth official language.
That compares to other countries, where the leader struggles to speak even one language.
But that’s not where they want you to look, as Tigran would say…
May you find your way through the chaos.