CEAC Commentary

April 22, 2020 

Oil Price and President Trump’s Diplomatic Strategy

By OKAMOTO Hiroaki

As the trends in crude oil price is getting attention, let us explore how drastically the price changed since March and what that implies.

The decline of crude oil price accelerated in early March, and took less than a month to mark 20 dollars per barrel, which was less than a half of what it was till then. There are many reasons for this. First of all, COVID-19 did not only slow down the world economy but actually stopped it, so the demand for crude oil sharply dropped.

So Saudi Arabia, who leads the oil pricing talks, summoned an extraordinary meeting of the Organization of Petroleum Exporting Countries (OPEC), with the “Plus” members including Russia, to discuss the oil production cut. The talk, however, did not come in agreement easily. The plan for extra production cut in addition to the already-taken cut measure infuriated Russia, and turned them to be uncooperative. Consequently, Saudi Arabia also started pumping up its oil production as Russia did.

The price drop became sharper as the rapture of the talk between Saudi Arabia and Russia, both parties to expand their production as a result, was reported.

It also caused the price breaking through the previous low, which was another reason. The oil market is relatively small in size and the oil price tends to drop drastically.

Having said that, it kind of looked like a fixed political game. The unappearent victim of the price collapse is the United States’ shale oil industry, and the Saudi Arabia and Russia’s moves were seen as an attack on the shale oil industry. The crude oil producing OPEC and American shale oil industry used to compete, but the latter have won the advantage due to the technological innovation and improvement in business performance. Now the U.S. has returned as the net oil producer, first time in 70 years.

Meanwhile, the vulnerability of American shale oil industry cannot be overlooked. The investments made to the industry in the last decade, said to be JPY 4.3 trillion worth, have not been collected, and many shale corporations are filing bankruptcy in the recent oil price drop.

This is where President Trump comes in to rescue. First, he intervened to Saudi Arabia and Russia to coordinate their reconsideration to decrease their oil production. Then during the four day period from April 9 on, OPEC Plus meeting and G20 Energy Ministers’ meeting, as well as President Trump’s phone calls with key counterparts were held intermittently, which came to fruition of 9.7 million bpd, or 10%, decrease in production.

Although, this was seen as one of more news to follow. The US, Canada, Brazil and other nonmembers of OPEC are expected to announce its coordination with the agreement, which will stimulate the market.

Despite Mexico’s refusal on the production cut proposed at OPEC Plus meeting on April 9, President Trump somehow settled it by offering that the US will cut its production on behalf of Mexico’s account. It seems that President Trump wanted to earn a diplomatic win here, with his favorite active style, as his administration has been occupied with the reactive policies against COVID-19 spread, while the presidential election in November is in near sight.

Even so, it was a complete diplomatic victory for President Trump now that Saudi Arabia owes him for concluding the agreement; Russia, for being assisted to make the deal; Mexico, too, as mentioned; as well as his northern neighboring oil producer Canada, for its economy supported. Needless to say, it turned out to be a good election campaign towards the national crude oil industry for making a contribution.

It was the first deal agreed in accordance among the world’s major oil producing countries that it shall be regarded as a notable achievement, even though it was a nearsighted production cut ---now we wait and see if the oil price rises as expected. To recover the economy back to a certain level requires a steady rise in prices. Amid the COVID-19 stagnation, the oil price drop will push the consumer price index down, which could give the US administration an image of poorly handling the economy. President Trump’s diplomatic strategy in the OPEC Plus deal making was a great victory to prevent such reputation.

(This is an English translation of the article written by OKAMOTO Hiroaki, an overseas business owner, which originally appeared on the e-forum “Hyakka-Somei (Hundred Ducks in Full Voice)” of CEAC on April 14, 2020.)