The policies adopted by the leading countries in the oil market influence the shape of the market and how it responds to changes. In March 2020, Russian policy drew the country into a price war with Saudi Arabia, leading to a sharp drop in crude oil prices. In response, the USA changed its short-term approach in order to protect the US shale oil industry, by pushing for an end to the Russian–Saudi price war and the completion of the OPEC+ deal, which was concluded on April 12. The deal is evidence of the many overlapping interests that these countries share, which enabled them to reach a deal on a number of policies despite having different objectives for the oil market.
Recently, US oil policy has focused on preventing either Saudi Arabia or Russia from setting the global oil strategy or affecting the US shale oil industry. The US shale industry has enabled the USA to become a major global oil producer, thereby helping it achieve independence in the oil market and gain a large degree of self-sufficiency. Russia, meanwhile, has focused its oil policy on increasing the market share of Russian oil and preserving conventional quotas while achieving maximum profitability through supports for oil prices, as Russia is dependent on oil as an important source of income for the Treasury. Russia is also keen to remove US shale from the competition and prevent it from obtaining a greater share of the market to the detriment of Russian market shares, particularly given that, in signing the recent agreement with the OPEC+ alliance to cut oil production, Russia agreed to reduce its market share in favor of US shale.
Against this background, this paper assesses the determining factors affecting Russian and US policy towards the oil market, including their potential flexibility and impact. This paper also examines the key institutions involved in setting oil policy in the two countries, the future path that these policies are likely to take, and the most likely outcomes.
Factors affecting US oil policy during the current crisis
Oil is one of the most important resources for US industrial and economic development. The US economy has therefore long been sensitive to any change in oil prices or production output. The USA therefore decided to modify its oil policies to enable it to move more independently within the market, by building up large strategic reserves and developing production techniques that would allow it to increase US oil production, as a result of which the USA has become the largest oil producer in the world. Nonetheless, US oil policy remains tied to a number of factors, as became evident during the recent crisis, namely:
1. Strategic reserve levels: Previous experience has proven how important it is for the USA to maintain large oil reserves on which it can rely during times of crisis. The US oil reserve is therefore one of the determining factors in shaping US oil policy on consumption, crude purchase rates, and available production rates The importance of the strategic reserve became all the more apparent when President Trump took the decision to fill it to capacity (around 75 million barrels) in order to counteract the surge in market supply and improve current price levels.
2. Global oil prices: The USA is currently attempting to achieve a price level that will protect the domestic shale industry while not harming domestic energy consumers, especially gasoline consumers, given the impending presidential elections.
3. Vulnerability of the US shale industry: The US shale sector has become one of the most important influencing factors on US oil policy, especially as the sector has helped the USA achieve oil dependence by providing large quantities of oil. The USA needs to maintain global oil prices above $40–60 if the sector is to continue to operate at a profit and to support increased US labor market activity and industrial production.
4. Oil supply chain: As the USA prefers to resort to its strategic reserves only in times of crisis, it obtains crude oil supplies both from local providers and through imports from strategic partners, primarily Saudi Arabia, to ensure that it receives enough crude oil on a daily basis to meet growing domestic needs. At the same time, the USA is using a number of military and economic tools (such as sanctions) to disrupt or halt oil supply chains in other parts of the world, thereby ensuring that supply does not outstrip demand, which would affect prices and damage the US shale industry. Nonetheless, the USA must continue to maintain a balance between ensuring a suitable price for the shale industry and keeping prices down for gasoline consumers (an important strategy in any presidential election).
5. Contribution of oil to the US energy mix: Increased efficiency in the automotive and energy sectors has led to a lower demand for oil than expected. Meanwhile, the widespread use of natural gas in industrial production poses a major competitor to oil within the USA, in particular given the discovery of large shale gas fields in the past decade, as a result of which a new focus has been placed on natural gas within US policy as an alternative fuel source capable of shielding the country against oil market crises.
6. Quality and efficiency of US crude: Despite being a major oil producer, the USA still needs to import more efficient types of oil for use in specific industries. Saudi Arabia, for example, is one of the USA’s few major sources of “sour crude” (Arab heavy crude), which is essential for diesel production. As West Texas Intermediate crude cannot be used in diesel production, sour crude must be imported.
7. Management of oil policy and electoral goals: Changes in oil prices and US production have long been linked to the electoral battle between Republicans and Democrats. The last thing any US president wants during a presidential election year is to raise diesel prices or cause a fuel shortage. This year, however, the situation is different: while many gasoline consumers are not benefiting from the low prices brought about by measures to combat the coronavirus, many shale companies are at risk of bankruptcy and require State support. Such action is opposed by the large conventional oil companies, however, which are attempting to push shale companies towards bankruptcy so that they can acquire them. Democrats in Congress are also opposed to proposals to support shale companies. For the first time, therefore, a drop in oil prices will not be in the President’s interest during the elections.
Factors affecting Russian oil policy during the current crisis
Oil is one of the main sources of income for the Russian Treasury, as energy exports represent some 40% of federal revenue. Russia has therefore long sought to keep oil prices high and increase its share of the market. There are, however, a number of factors that influence Russian oil policy, particularly given that Russia lost the price war against Saudi Arabia, which had an impact on the Russian oil sector:
1. Dependence of the Russian economy on the oil market: The Russian economy is greatly affected by changes in the global oil market. Russia is therefore less able to make any significant changes to its oil policies, as it needs to protect oil prices in order to support its currency and its economy, the latter of which is closely tied to both the oil and gas markets.
2. Level of competition for current and future market share: Russian policies regarding the oil market have long been linked to international competition for Russia’s current and future market share, as made evident during the recent price war. Saudi Arabia’s decision to sell crude on the European market (which traditionally falls within Russian quotas) at a reduced price affected Russia’s decision to return to the agreement on reducing production. Furthermore, competition from the USA in the European liquefied natural gas market was one of the factors that pushed Russia into the price war with the aim of affecting the US shale industry, just as the USA had affected Russia’s share in the European gas market.
3. Competition between different production methods and the quality of Russian oil products: Russia’s conventional methods of oil production increase the competitiveness of Russian oil over high-cost US shale oil, meaning that Russia is able to affect US industry through by lowering its prices. A major obstacle to this approach, however, is the inability of the Russian economy to withstand low oil prices for long periods.
4. Interests of major Russian oil companies: The major Russian oil companies, such as Rosneft, tend to invest widely in the regional and international energy sector, which influences Russian policies and approaches towards the States in which these interests are located. Russian oil companies also have interests in the international oil market. Russia’s recent price war with Saudi Arabia has been interpreted as an attempt at retaliation against the US shale industry with the aim of forcing President Trump to revoke the sanctions imposed on Rosneft’s trading arm and the Nord Stream pipelines.
5. Oil prices and possible alliances: Russia’s need to maintain oil prices above a certain level in the international oil market has forced it to enter into international alliances, sometimes with competing blocs, such as the OPEC+ coalition.
Flexibility in US oil policy
US oil policy is moderately flexible in the face of the current market crisis:
1. A number of factors increase the flexibility of US policy, including the USA’s ability to place significant pressure on the oil market through its political influence, which helped lead to the conclusion of the OPEC+ deal on April 12. The USA also has its strategic oil reserves, which it recently decided to fill to capacity as a means of withdrawing supply from the oil market. In addition, the USA has hinted at the possibility of imposing fees on Russian and Saudi oil imports in order to curb the price war between the two countries, or of imposing sanctions against them by adopting a package of laws that could limit the capabilities of OPEC and of major oil companies in Saudi Arabia and Russia, first and foremost Aramco.
2. Factors limiting flexibility in US oil policy include the need to protect the shale industry by maintaining prices above a certain level, while also keeping prices low for gasoline, on which US consumers are dependent. In addition to the current election-motivated conflict between various institutions involved in oil policy-making, the eternal conflict between the Presidency and Congress continues to burn.
Flexibility in Russian oil policy
Russian oil policy retains little flexibility owing to the following factors:
1. Although Russia’s economy is diverse enough to enable Russia to withstand a drop in oil prices to around $40 per barrel, as opposed to competing oil producers such as Saudi Arabia, which can sustain prices no lower than $80 a barrel, oil prices below $40 a barrel pose a major threat to the Russian economy and to the value of the Russian currency, meaning that Russia is unable to manipulate prices to such a low level (as would be required to weaken the US shale industry, for example).
2. Russia cannot afford to face competition over its conventional market share, in particular in the European market, on which it is heavily dependent. The appearance of any new competitors therefore reduces Russia’s flexibility in any oil policies that it pursues.
Key institutions involved in US policy-making in the oil sector
While various institutions contribute to oil policy-making in the USA, the following are the most important:
1. The Presidency (the President and the energy sector policies adopted by his party): The President’s views are crucial in shaping US oil policy. An example of this is Trump’s efforts to support the US shale sector at a time when it is in his interest to ensure a low price for US gasoline, while also building strong relations with oil allies, primarily Saudi Arabia.
2. US Congress: Electoral considerations always influence Congress’s approach to energy policy. Congress plays a role in issuing laws that protect US interests in the energy sector and support the capabilities of the US strategic reserve. Congress is currently hinting that it may adopt a bill prohibiting the formation of cartels of oil producers and exporters, and there has been mounting pressure on Trump to sign such a bill into law since the Saudi–Russian price war began. While such a bill has yet to be brought into law, if enacted it would become illegal to set production ceilings for oil (or gas), or to artificially control prices as OPEC, OPEC+, and Saudi Arabia have done. One consequence would be that OPEC and its members would immediately lose the sovereign immunity that they have thus far enjoyed within US courts, thereby exposing those States to prosecution under US law.
3. Relevant technical institutions: These include the US Department of Energy and technical agencies. They make recommendations to the Presidency and Congress regarding the oil market, production, and consumption.
4. Information and consulting institutions: These include the US Energy Information Administration and think tanks specializing in energy research. They make predictions regarding the future of US production and consumption and possible future scenarios.
5. Alliance of conventional US oil companies: This alliance works to influence US policy in favor of large oil companies and to block bills that would provide support for shale companies or large companies.
6. Alliance of shale oil companies: As this alliance has helped the USA to become more independent on the oil market by dramatically increasing domestic production and driving up employment and industrial production rates, the State is working to protect the sector and to develop the companies working in it.
Key institutions involved in Russian policy-making in the oil sector
The following are some of the key institutions involved in Russian oil policy-making:
1. The Russian Presidency: The Russian President is largely responsible for developing the country’s oil policy, given the significant role that he plays in the Russian decision-making institutions. This was made evident during the recent price war with Saudi Arabia, during which Russia initially refused to renew the agreement on reducing production, only to return to the agreement later on.
2. The Russian oil lobby, led by Rosneft: While these companies play a role in deciding the priorities for Russian oil policy, the largest companies in the lobby are often also able to influence oil policy. With the exception of Rosneft, Russia’s largest oil company, Russian oil companies criticized the government’s decision not to agree to the additional plan to reduce production proposed by OPEC and independent producers. Oil experts, media professionals, and university professors also criticized the decision on the grounds that Russia would have benefited from such an agreement thanks to an increase in prices. The government did not respond to such criticism, however.
3. Research and consulting institutions: These include the National University of Oil and Gas and other consulting centers in the energy sector. Such centers are not considered as vital or influential as US energy centers with regard to the data and information that they produce, their market predictions, or the support that they provide to decision-makers.
4. Technical and executive institutions: These include the Ministry of Energy and technical agencies operating in the sector. They play a purely executive role in writing oil policy.
Degree of influence of Russian and US oil policy during the current crisis
The degree of influence of each country’s policies can be measured as follows:
1. Degree of influence of US policy during the crisis
a. The USA flooded the market with shale oil, thereby reducing the effectiveness of the OPEC+ deal and taking the place of OPEC countries within the market that had lost out due to the decrease in production quotas. Some OPEC+ countries, primarily Russia, considered not extending the agreement as a result of the losses sustained.
b. The USA played a role in securing the OPEC+ agreement, both through President Trump’s political influence and through its mediation between the Russian President and the Saudi Crown Prince, as well as by taking on some of Mexico’s production restrictions in exchange for Mexico signing the agreement.
c. By deciding to fully restock its strategic reserves, the USA has reduced the available supply on the market. President Trump took the decision to refill the roughly 75 million barrels in the reserve in order to improve prices.
d. Pressure has increased inside the USA to impose sanctions on Russia and Saudi Arabia. According to some analysts, the US President intends to use all available options to compel Saudi Arabia to compensate the USA for the huge losses sustained as a result of low oil prices once the price war is over. The USA may impose fees on Saudi oil imports, as more Saudi oil is imported into the USA than Russian oil.
2. Degree of influence of Russian policy during the crisis
The degree of influence of Russian oil policy during the recent crisis is evident in the following:
a. Initially, Russia contributed to the success of the OPEC+ alliance by reaching an agreement on cuts with Saudi Arabia. However, Russia’s sudden change in policy following the renewal of the agreement sparked an oil war that contributed to a drop in prices and market stagnation.
b. In signing the new agreement designed to reinvigorate the oil market (albeit not significantly, and with no guarantees of success), Russia has returned to the OPEC+ alliance. Russia’s policies regarding the oil market and US shale producers remain a source of concern for many analysts, however, who anticipate that Russia will return to similar practices in the future.
Future scenarios for the global oil market in light of US and Russian policies
Scenario 1: Low oil prices in the short term, with an improvement in the medium and long term: Demand for oil will remain low in the short term owing to weak economic growth as a result of the economic crisis caused by the coronavirus pandemic. Together with the glut of oil on the market, this will continue to keep prices low. Supply will decrease significantly in the medium and long term as a result of declining investment in the oil sector and the drop in production, or complete withdrawal from the market, by US shale producers. This will help reduce the oversupply of oil and gradually restore balance to the oil market. Demand will increase as countries such as the USA begin to purchase excess supply for their strategic reserves and as economic indicators improve, which will help improve prices in response to a gradual improvement in the global economy following the easing of lockdown procedures and the reopening of commercial and industrial businesses. Prices may be pushed even higher if the US Congress makes any moves against the OPEC States, as this would cause confusion in the oil market that would affect the oil supply from those States. This is the most likely scenario, in which oil producing nations will attempt to improve prices by controlling supply, and may cooperate with consumer countries to increase demand in order to improve the market.
Scenario 2: In the medium and long term, prices continue to drop and oversupply may once again become a problem: This scenario is driven by a number of factors, including the possible deterioration of the global economy resulting from a second wave of coronavirus infections, leading to a period of economic contraction, recession, and a decline in global investments, including in the energy sector. The OPEC+ agreement may not be renewed, and oil producing countries may decide to return to maximum production capacity in anticipation of competition from clean and renewable energy sources and the possible decline of oil within the global energy mix. Prices would therefore remain low, particularly most oil companies are predicting that demand will peak between 2030 and 2035 as gas vehicles are replaced by electric vehicles.
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EPC | 12 Jan 2021
EPC | 11 Jan 2021