Benjamin Cherry-Smith
Six years after President Obama set the goal for the United States (US) to “free itself from foreign oil” the country can claim to be becoming more energy independent. This means that as of 2018, the US produced 94 percent of its total energy consumption, effectively allowing to weather disruptions within the global energy supply.
US energy independence has become a reality because of the “Shale Revolution”—fracking. However, it is the same reliance on shale oil which puts it at risk of losing that security and any hopes of becoming independent. US shale oil producers need oil prices to be high due to the increased costs associated with production. Reliance on high fuel costs to cover higher production costs makes the US energy independence possible, but expensive. However, as COVID-19 depresses global energy demand and Saudi Arabia and Russia engage in an oil price war, the US energy independence is looking shaky in the short-term.
Global Oil Price War
Global oil prices are controlled through a fragile alliance between the Organization of the Petroleum Exporting Countries (OPEC)–where Saudi Arabia is considered the de facto leader—and Russia—the world’s largest independent producer of oil. In effect, this makes the relationship between Saudi Arabia and Russia critical in the long-term maintenance and stability of the global energy market. This relationship is also vital to address the turbulence caused by COVID-19.
In a meeting held from 4-6 February, OPEC met to discuss the effect that COVID-19 was having on Chinese—and global—energy demand. They worried that the reduction in Chinese demand for fuel, an essential market for OPEC states, meant there was a need for lower production targets to be set. The result of this meeting saw the recommendation to cut production by 600,000-barrels-a-day. Chief oil analyst at Energy Aspects, Amrita Sen described this as OPEC’s attempt to “put a floor under prices.” However, Russia was holding out reducing its production of oil, much to ire of Saudi Arabia.
In OPEC’s meeting on 6 March, member states recommended that a further production cut up to 1,500,000-barrels-a-day should be instated to stabilise global prices. However, Russia rebuked this move; instead, after suffering from years of US sanctions, Moscow does not want to enable the US oil industry to continue to grow. Moscow’s unwillingness led Riyadh to increase its oil output which lowered the price per barrel to US$33.
This price war, amid COVID-19, is the situation that US oil producers find themselves in. It severely undercuts their profit margins and risks their ability to operate—needing US$53 per barrel to break even.
Economic Stimulus Package and Bailouts
At the same time as COVID-19 is depressing oil prices, the global pandemic has also caused global stock markets to fall. During March, the US stock market saw its inbuilt ‘circuit breakers’–which halts trading for 15 minutes–triggered four times due to a fall in trading caused by the worsening COVID-19 situation.
In response to the pandemic’s ongoing disruption to the stock market, the Federal Reserve announced that it would be injecting US$1.5T into the market to ensure its stability. Where the Federal Reserve is seeking to maintain market stability, Congress is negotiating an introduction of a stimulus package.
President Trump initially urged Congress to pass a US$1T stimulus package to aid in an economic recovery. Still, after rounds of negotiations and setbacks, the Senate passed a US$2T stimulus package. In its current form, it broadly aims to support individuals, businesses, companies, and the Federal Reserve, while specifically supporting health care providers.
Regarding US energy independence, the White House has previously indicated that it would seek to include a bailout package for oil and gas producers in the stimulus package. This bailout would come off the back of the continued downturn in demand for oil and US energy company Chevron announcing cutbacks in personnel and investments.
As it currently stands, the stimulus package does not contain any direct funding for American energy companies, but has allocated US$500B for loans to US companies in need. It is conceivably that energy companies could receive loans under this loan scheme, but two rules would make it difficult for President Trump to allocate funds where he determines. The first is that the funds will be placed under an inspector general and accountability committee, and subject to public reporting. Secondly, the bill prohibits loans going to any business controlled by the president, vice president, members of Congress and the heads of executive departments.
Whatever the outcome, there is no doubt that US energy companies are facing significant challenges that threaten the continued development of US energy independence. The lowered demand from fuel as a result of COVID-19, Russia seeking to undermine US oil companies, and Saudi Arabia forcing the global energy prices down, are making US oil less competitive.
Benjamin Cherry-Smith is a Master of Arts (Research) Candidate at the University of the Sunshine Coast where he researches ontological in/security in international politics.