Riyadh prepares emergency budget for $12-20 a barrel oil; “It’s all about egos now.”
Saudi Arabia and Russia intensified an escalating oil-market war on Tuesday, with Riyadh set to raise output to record levels and Moscow saying it was ready to pump more crude.
State-run Saudi Arabian Oil Co. said it would boost production to 12.3 million barrels a day in April, some 300,000 barrels a day over the company’s previous maximum sustained capacity.
Russian Energy Minister Alexander Novak, meanwhile, said his country could rapidly open its own taps.
Even as the price war escalated with fresh salvos from both sides, former Saudi energy minister Khalid al-Falih was in talks with Mr. Novak in an attempt to reverse the production hikes and revive the collective OPEC-Russia output curbs, according to Saudi-government advisers and officials.
Mr. Falih, who negotiated the initial production cuts in 2016, is now Saudi Arabia’s minister of investments. His outreach to Mr. Novak is done with the approval of Saudi authorities, the advisers said. If Mr. Falih’s mediation succeeds, the advisers and officials said, OPEC and its allies including Russia will convene an emergency meeting in April.
Mr. Novak said Moscow isn’t ruling out further cooperation with OPEC, adding that the next scheduled meeting is planned for May or June.
“The doors are not closed,” he said.
Amid the escalating fight, President Trump called Saudi Crown Prince Mohammad bin Salman on Monday to discuss global energy markets, the White House said Tuesday morning. The leaders also discussed “other critical regional and bilateral issues,” according to a statement.
Global GlutOil prices have fallen as demand from China has slowed and Saudi Arabia haspledged to pump more.
Saudi Arabia and Russia’s decisions to flood markets are surprising, as China—the world’s largest oil importer—has been hobbled by the deadly coronavirus, which has hurt its demand for oil after refineries and factories were forced to shut.
Saudi Arabia’s struggle for oil-market supremacy might earn it a sliver of market share at the expense of Russia and rival U.S. shale producers, but the cost of a price war might be too much for the kingdom to bear, analysts and oil officials say.
The combination of declining global consumption and rising supply pushed Brent crude, the benchmark for global prices, to its sharpest decline since the first Gulf War in 1991 on Monday. Some of these losses were recouped Tuesday as the Brent oil price gained 8% amid a broader revival in markets.
Saudi Arabia’s aggressive discounts are targeting some of Russia’s core markets in China and Northern Europe. The kingdom is also taking aim at U.S. oil producers, Saudi and OPEC officials said.
The Russian energy minister declined to comment and the Saudi energy minister didn’t respond to a request for comment.
Some oil officials say theystruggle to see the logic behind Saudi Arabia’s decisions. Others see the battle as tied to Prince Mohammed’s recent efforts to tighten his grip on power and raise his international clout, according to people involved in the OPEC talks.
Russia’s failure to find common ground with Saudi Arabia and OPEC on oil cuts was preceded by talks in early February between Riyadh and Moscow that focused on the possibility of forging a broader, long-term alliance. Under one scenario, Saudi Arabia would have sped up its investments inside sanctions-hit Russia and backed the Kremlin’s military efforts in Syria, according to people familiar with the matter.
Ultimately, the crown prince didn’t commit to a deal, say the people familiar with the matter, because he didn’t want to alienate the U.S. Weeks later, roughly at the same time that Russia was refusing to endorse the Saudi-backed plan to cut oil output, Mr. Putin was initiating a rapprochement with Turkey, a Saudi foe, the people said.
“It’s all about egos now, not about the oil market,” said a Saudi-government adviser.
Meanwhile, Prince Mohammed saw the OPEC debate as a way to assert his broad influence over the kingdom’s oil policies and to prove to his older brother, Saudi energy minister Prince Abdulaziz bin Salman, that he could force Russia’s hand, according to people familiar with his thinking.
In a terse phone call to Prince Abdulaziz late Thursday, the crown prince overruled his brother, who had agreed to a three-month production cut with OPEC, and extended the proposed cuts through the end of the year, these people said.
Prince Abdulaziz bin Salman, Saudi Arabia’s energy minister, on Thursday.
PHOTO: CHRISTIAN BRUNA/SHUTTERSTOCK
The crown prince ordered the minister to force OPEC to adopt the decision—even if that meant risking any hope that Russia would join in, they said.
Now the kingdom is pursuing a strategy of undercutting its rivals by drowning markets with cheaper oil—a move that has a tendency to backfire, say longtime market watchers.
On Saturday, the Saudi energy ministry told Aramco officials that instead of cutting production, they should pump more oil and lower the price. Saudi Arabia soon spread the word throughout the market. “It was the Saudi declaration of war against Putin,” said a senior Saudi official.
Within hours, officials at the finance ministry were tasked with preparing a budget scenario that envisions benchmark Brent crude prices dropping into a $12-$20 a barrel range. All Saudi ministries were also asked to cut their spending significantly to prepare for this scenario.
But the strategy has backfired before.
In 2014, then-Saudi oil minister Ali al-Naimi persuaded OPEC to pump at will to compete with U.S. shale producers. His rationale was that the cartel’s members had the ability to produce at extremely low costs. But after the price of Brent crude fell below $28 a barrel in early 2016, the Saudi royal family fired him. His successor, Mr. Falih, negotiated a pact between OPEC and Russia to cut production in the first OPEC+ deal. Within months, oil prices more than doubled.
The move to depress prices also missed its mark in the 1980s and led to a period known in oil circles as the “Lost Decade.”In 1986, OPEC faced competition from rising North Sea production. Saudi Arabia’s delegation was so upset about OPEC members flouting the group’s production agreements that it unleashed a flood of oil that sank prices for a prolonged period.
Eventually, Saudi Arabia backtracked and cut production, but the move wasn’t a complete failure, as it helped score a political victory against the Soviet Union. Riyadh had been backing insurgents battling Russia in Afghanistan—many of whom would later found al Qaeda. As the oil price fell to around $30 a barrel, Russia faced a budget crisis that contributed to food shortages and an end to its war in Afghanistan. Its then-leader Mikhail Gorbachev retreated from Kabul and launched the restructuring of Russia under his perestroika policy.
Russia is better prepared to weather low oil prices than in the past. Oil is now accounts for less than a third of budget revenue. The country has also accumulated massive reserves. The Russian finance ministry said Monday that it could withstand 10 years of prices at $25 to $30 a barrel.
Still, some Russian producers say the oil-market war is excessive.
“I’m in shock. This is a very unexpected, irrational decision to put it mildly,” Leonid Fedun, vice president of Russian private producer Lukoil was reported as telling Russian newspaper the Bell. Russian oil companies would like to increase production, he said, but that won’t make up for losses from falling prices.
The mood is more somber in Saudi Arabia, which needs oil prices over $60 a barrel to balance its budget, according to Saudi officials. The kingdom is now contending with its own coronavirus outbreak, moving Monday to suspend all air travel with many of its neighbors.
Saudi Arabia’s national oil company Aramco fell about 7% to 27.95 riyals ($7.45) a share on the Saudi domestic exchange Monday. The Saudi price decrease has “literally burned all global energy investors,” said a Saudi official. “[Saudi Aramco] Won’t sell a share to foreigners again,” he said, referring to the Crown Prince’s plan to list Aramco internationally.
A dictator meets an opponent he can’t co-opt, corrupt, calumniate, cow or coerce.
The Russian human-rights lawyer Karinna Moskalenko once explained to me how Vladimir Putin’s machinery of repression works.
“It isn’t necessary to put all the businessmen in jail,” she said. “It is necessary to jail the richest, the most independent, the most well-connected.
It isn’t necessary to kill all the journalists. Just kill the most outstanding, the bravest, and the others will get the message.”
Her conclusion: “Nobody is untouchable.”
That was in 2007, when Putin still cultivated an image as a law-abiding, democratically elected leader. But that fiction vanished long ago.
Boris Nemtsov, the leading opposition figure, was murdered in the shadow of the Kremlin in 2015. His successor in that role, Alexei Navalny, has been in and out of prison on various trumped-up charges, as well as the victim of repeated attacks by “unknown chemicals.” Others, like the Putin critic and ex-Parliament member Denis Voronenkov, have been gunned down in broad daylight in foreign cities.
Sobol, 31, is a Moscow lawyer and Navalny associate who has spent years pursuing a graft investigation of Putin intimate Yevgeny Prigozhin, the oligarch indicted by the U.S. last year for sponsoring the troll factory that interfered in the 2016 U.S. election. Considering that journalists have been killed looking into Prigozhin’s other businesses, Sobol’s doggedness recalls Eliot Ness’s pursuit of Al Capone in “The Untouchables” — except, unlike Ness, she has no knife, no gun, no badge, no law, and no federal government to aid her.
Now she is at the forefront of protests that have rocked Russia this summer after the regime disqualified opposition candidates (including her) from running in Sunday’s municipal elections. Her husband has been poisoned. Assailants have smeared her with black goo. Police dragged her from her office. Only a law forbidding the imprisonment of women with young children has kept her out of jail.
“I am always asked whether I am afraid, and I know that I should say, ‘Yes, I am,’” she tells Higgins. But, she says, “I am a fanatical kind of personality and am not afraid. I have always been a fan of the idea of fairness and, since childhood, have hated to see the strong abuse the weak.”
When regimes like Putin’s realize they cannot co-opt, corrupt, calumniate, cow, or coerce their opponents, what usually comes next is a decision to kill them. The risk that this could happen to Sobol or Navalny is terrifyingly real, not least because Putin has so many underworld friends willing to do his presumptive bidding without asking for explicit orders.
But Putin also needs to beware. Dictatorships fall not only when they have implacable opponents but also exemplary victims: Steve Biko in South Africa, Benigno Aquino in the Philippines, Jerzy Popieluszko in Poland. Through their deaths, they awakened the living to the conviction that it was the regime that should die instead.
Today, Nemtsov continues to haunt the Kremlin. So do Sergei Magnitsky, Natalia Estemirova, Alexander Litvinenko and Anna Politkovskaya, to name just a few of the regime’s murdered adversaries. At some point, a growing list of victims will start to weigh heavily against Putin’s chances of staying in power. The death of a galvanizing opposition figure could be the tipping point.
Especially when the political-survival formula that has worked for Putin so far is coming unstuck. That formula —
enrich your cronies,
terrify your foes,
placate the urban bourgeoisie with a decent standard of living, and
propagandize everyone else with heavy doses of xenophobic nationalism
— no longer works so well in an era of
Magnitsky sanctions,
international ostracism,
a persistently stagnant economy,
middling oil prices,
unpopular pension reforms, and
dubious foreign adventures.
It works even less well when your domestic foes aren’t so easily terrified. As in Hong Kong, a striking feature of the Russian protests is the extent to which they are youth-driven — a vote of no-confidence in whatever the regime is supposed to offer. One recent survey found that the number of young Russians who “fully trust” Putin fell to 19 percent this year, from 30 percent last year. That’s not a good trend line for a man who aspires to die on his throne.
None of this guarantees that Putin can’t bounce back, not least if Donald Trump gives him the kinds of breaks, like readmission into the G7, he needs. And Robert Mugabe’s death this week at 95 is a reminder that tyrants can endure longer than anyone expects.
Still, for the first time in 20 years, the elements by which Putin falls are coming into place. Core among them is the courage of people like Sobol — a woman who, as Pericles said more than 2,400 years ago, “knows the meaning of what is sweet in life and of what is terrible, and then goes out undeterred to meet what is to come.”
Related
‘I Am Always Asked if I Am Afraid’: Activist Lawyer Takes On Putin’s Russia
He Played by the Rules of Putin’s Russia, Until He Didn’t: The Story of a Murder
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Unlike the 2008 global financial crisis, which was mostly a large negative aggregate demand shock, the next recession is likely to be caused by permanent negative supply shocks from the Sino-American trade and technology war. And trying to undo the damage through never-ending monetary and fiscal stimulus will not be an option.
NEW YORK – There are three negative supply shocks that could trigger a global recession by 2020. All of them reflect political factors affecting international relations, two involve China, and the United States is at the center of each. Moreover, none of them is amenable to the traditional tools of countercyclical macroeconomic policy.
The first potential shock stems from the Sino-American trade and currency war, which escalated earlier this month when US President Donald Trump’s administration threatened additional tariffs on Chinese exports, and formally labeled China a currency manipulator. The second concerns the slow-brewing cold war between the US and China over technology. In a rivalry that has all the hallmarks of a “Thucydides Trap,” China and America are vying for dominance over the industries of the future: artificial intelligence (AI), robotics, 5G, and so forth. The US has placed the Chinese telecom giant Huawei on an “entity list” reserved for foreign companies deemed to pose a national-security threat. And although Huawei has received temporary exemptions allowing it to continue using US components, the Trump administration this week announced that it was adding an additional 46 Huawei affiliates to the list.
The third major risk concerns oil supplies. Although oil prices have fallen in recent weeks, and a recession triggered by a trade, currency, and tech war would depress energy demand and drive prices lower, America’s confrontation with Iran could have the opposite effect. Should that conflict escalate into a military conflict, global oil prices could spike and bring on a recession, as happened during previous Middle East conflagrations in 1973, 1979, and 1990.
All three of these potential shocks would have a stagflationary effect, increasing the price of imported consumer goods, intermediate inputs, technological components, and energy, while reducing output by disrupting global supply chains. Worse, the Sino-American conflict is already fueling a broader process of deglobalization, because countries and firms can no longer count on the long-term stability of these integrated value chains. As trade in goods, services, capital, labor, information, data, and technology becomes increasingly balkanized, global production costs will rise across all industries.
Moreover, the trade and currency war and the competition over technology will amplify one another. Consider the case of Huawei, which is currently a global leader in 5G equipment. This technology will soon be the standard form of connectivity for most critical civilian and military infrastructure, not to mention basic consumer goods that are connected through the emerging Internet of Things. The presence of a 5G chip implies that anything from a toaster to a coffee maker could become a listening device. This means that if Huawei is widely perceived as a national-security threat, so would thousands of Chinese consumer-goods exports.
It is easy to imagine how today’s situation could lead to a full-scale implosion of the open global trading system. The question, then, is whether monetary and fiscal policymakers are prepared for a sustained – or even permanent – negative supply shock.
Following the stagflationary shocks of the 1970s, monetary policymakers responded by tightening monetary policy. Today, however, major central banks such as the US Federal Reserve are already pursuing monetary-policy easing, because inflation and inflation expectations remain low. Any inflationary pressure from an oil shock will be perceived by central banks as merely a price-level effect, rather than as a persistent increase in inflation.
Over time, negative supply shocks tend also to become temporary negative demand shocks that reduce both growth and inflation, by depressing consumption and capital expenditures. Indeed, under current conditions, US and global corporate capital spending is severely depressed, owing to uncertainties about the likelihood, severity, and persistence of the three potential shocks.
In fact, with firms in the US, Europe, China, and other parts of Asia having reined in capital expenditures, the global tech, manufacturing, and industrial sector is already in a recession. The only reason why that hasn’t yet translated into a global slump is that private consumption has remained strong. Should the price of imported goods rise further as a result of any of these negative supply shocks, real (inflation-adjusted) disposable household income growth would take a hit, as would consumer confidence, likely tipping the global economy into a recession.
Given the potential for a negative aggregate demand shock in the short run, central banks are right to ease policy rates. But fiscal policymakers should also be preparing a similar short-term response. A sharp decline in growth and aggregate demand would call for countercyclical fiscal easing to prevent the recession from becoming too severe.
In the medium term, though, the optimal response would not be to accommodate the negative supply shocks, but rather to adjust to them without further easing. After all, the negative supply shocks from a trade and technology war would be more or less permanent, as would the reduction in potential growth. The same applies to Brexit: leaving the European Union will saddle the United Kingdom with a permanent negative supply shock, and thus permanently lower potential growth.
Such shocks cannot be reversed through monetary or fiscal policymaking. Although they can be managed in the short term, attempts to accommodate them permanently would eventually lead to both inflation and inflation expectations rising well above central banks’ targets. In the 1970s, central banks accommodated two major oil shocks. The result was persistently rising inflation and inflation expectations, unsustainable fiscal deficits, and public-debt accumulation.
Finally, there is an important difference between the 2008 global financial crisis and the negative supply shocks that could hit the global economy today. Because the former was mostly a large negative aggregate demand shock that depressed growth and inflation, it was appropriately met with monetary and fiscal stimulus. But this time, the world would be confronting sustained negative supply shocks that would require a very different kind of policy response over the medium term. Trying to undo the damage through never-ending monetary and fiscal stimulus will not be a sensible option.
You know the moment in a horror movie when the characters are going about their business and nothing bad has happened to them yet, but there seem to be ominous signs everywhere that only you, the viewer, notice?
That’s what watching global financial markets the last couple of weeks has felt like.
In a lot of ways, nothing looks particularly wrong. The S&P 500 was down 0.7 percent Wednesday, tumbling for a second consecutive session, but over all is down only about 5.5 percent from its early May high. The unemployment rate is at a five-decade low. With major companies nearly done releasing their first-quarter results, 76 percent had results above expectations.
But along the way, global bond prices have soared, driving interest rates down sharply. Ten-year Treasury bonds are yielding only 2.26 percent as of Wednesday’s market close, down nearly a full percentage point since November 2018. The outlook for inflation in the years ahead is falling as well, as are the prices of oil and other commodities.
Most significant, the fall in longer-term bond yields has not been matched by a fall in shorter-term rates. For example, a 30-day Treasury bill is yielding 2.35 percent — meaning you can earn more on your money tying it up for a month risk-free than you can tying it up for a full decade.
This is not normal. It is called an inverted yield curve, and historically it has been viewed as a sign of a recession in the offing. At a minimum, it indicates that bond investors believe the Federal Reserve will soon need to cut interest rates — in effect, that it overshot with those four rate increases last year.
There is also a soft underbelly to some of the good economic data of late. Orders for capital goods like business equipment fell 0.9 percent in April, suggesting companies may not be in an expansionary mood. The Institute for Supply Management’s index of activity at manufacturing companies fell sharply in the most recent reading, though it remained in expansion territory.
The financial markets don’t always tell a tidy little story about what is happening, but here’s a theory about reconciling the apparent calm in the economy with the many worrying signs.
The breakdown in trade negotiations with China and the imposition of tariffs on Chinese goods are part of the story, but only a part.
Businesses have weathered escalating tariffs for two years now, and while tariffs can be costly, they do not need to wreck the economy. After all, prices for products fluctuate for all sorts of reasons, and market economies are pretty good at adjusting.
NEW YORK – There are three negative supply shocks that could trigger a global recession by 2020. All of them reflect political factors affecting international relations, two involve China, and the United States is at the center of each. Moreover, none of them is amenable to the traditional tools of countercyclical macroeconomic policy.
The first potential shock stems from the Sino-American trade and currency war, which escalated earlier this month when US President Donald Trump’s administration threatened additional tariffs on Chinese exports, and formally labeled China a currency manipulator. The second concerns the slow-brewing cold war between the US and China over technology. In a rivalry that has all the hallmarks of a “Thucydides Trap,” China and America are vying for dominance over the industries of the future: artificial intelligence (AI), robotics, 5G, and so forth. The US has placed the Chinese telecom giant Huawei on an “entity list” reserved for foreign companies deemed to pose a national-security threat. And although Huawei has received temporary exemptions allowing it to continue using US components, the Trump administration this week announced that it was adding an additional 46 Huawei affiliates to the list.
The third major risk concerns oil supplies. Although oil prices have fallen in recent weeks, and a recession triggered by a trade, currency, and tech war would depress energy demand and drive prices lower, America’s confrontation with Iran could have the opposite effect. Should that conflict escalate into a military conflict, global oil prices could spike and bring on a recession, as happened during previous Middle East conflagrations in 1973, 1979, and 1990.
All three of these potential shocks would have a stagflationary effect, increasing the price of imported consumer goods, intermediate inputs, technological components, and energy, while reducing output by disrupting global supply chains. Worse, the Sino-American conflict is already fueling a broader process of deglobalization, because countries and firms can no longer count on the long-term stability of these integrated value chains. As trade in goods, services, capital, labor, information, data, and technology becomes increasingly balkanized, global production costs will rise across all industries.
Moreover, the trade and currency war and the competition over technology will amplify one another. Consider the case of Huawei, which is currently a global leader in 5G equipment. This technology will soon be the standard form of connectivity for most critical civilian and military infrastructure, not to mention basic consumer goods that are connected through the emerging Internet of Things. The presence of a 5G chip implies that anything from a toaster to a coffee maker could become a listening device. This means that if Huawei is widely perceived as a national-security threat, so would thousands of Chinese consumer-goods exports.
It is easy to imagine how today’s situation could lead to a full-scale implosion of the open global trading system. The question, then, is whether monetary and fiscal policymakers are prepared for a sustained – or even permanent – negative supply shock.
Following the stagflationary shocks of the 1970s, monetary policymakers responded by tightening monetary policy. Today, however, major central banks such as the US Federal Reserve are already pursuing monetary-policy easing, because inflation and inflation expectations remain low. Any inflationary pressure from an oil shock will be perceived by central banks as merely a price-level effect, rather than as a persistent increase in inflation.
Over time, negative supply shocks tend also to become temporary negative demand shocks that reduce both growth and inflation, by depressing consumption and capital expenditures. Indeed, under current conditions, US and global corporate capital spending is severely depressed, owing to uncertainties about the likelihood, severity, and persistence of the three potential shocks.
In fact, with firms in the US, Europe, China, and other parts of Asia having reined in capital expenditures, the global tech, manufacturing, and industrial sector is already in a recession. The only reason why that hasn’t yet translated into a global slump is that private consumption has remained strong. Should the price of imported goods rise further as a result of any of these negative supply shocks, real (inflation-adjusted) disposable household income growth would take a hit, as would consumer confidence, likely tipping the global economy into a recession.
Given the potential for a negative aggregate demand shock in the short run, central banks are right to ease policy rates. But fiscal policymakers should also be preparing a similar short-term response. A sharp decline in growth and aggregate demand would call for countercyclical fiscal easing to prevent the recession from becoming too severe.
In the medium term, though, the optimal response would not be to accommodate the negative supply shocks, but rather to adjust to them without further easing. After all, the negative supply shocks from a trade and technology war would be more or less permanent, as would the reduction in potential growth. The same applies to Brexit: leaving the European Union will saddle the United Kingdom with a permanent negative supply shock, and thus permanently lower potential growth.
Such shocks cannot be reversed through monetary or fiscal policymaking. Although they can be managed in the short term, attempts to accommodate them permanently would eventually lead to both inflation and inflation expectations rising well above central banks’ targets. In the 1970s, central banks accommodated two major oil shocks. The result was persistently rising inflation and inflation expectations, unsustainable fiscal deficits, and public-debt accumulation.
Finally, there is an important difference between the 2008 global financial crisis and the negative supply shocks that could hit the global economy today. Because the former was mostly a large negative aggregate demand shock that depressed growth and inflation, it was appropriately met with monetary and fiscal stimulus. But this time, the world would be confronting sustained negative supply shocks that would require a very different kind of policy response over the medium term. Trying to undo the damage through never-ending monetary and fiscal stimulus will not be a sensible option.