The collapse of energy prices because of the coronavirus crisis, combined with Saudi and Russian refusals to curb production, has already forced the suspension of the Shell project that Trump touted in Western Pennsylvania. The crash is also estimated to knock out about half of all shale producers, according to analysts at Raymond James Inc., if prices remain at between $20 and $30 per barrel. (The price as of midday Monday was $22.73 per barrel by the standard West Texas Intermediate benchmark.) A price at that level would cost thousands of jobs and deal a serious blow to the vision of U.S. energy independence.
“There is no sugar-coating it, U.S. oilfield activity will collapse with oil prices well below $30,” on the WTI benchmark, said analyst Praveen Narra of Raymond James in a market update published on March 23. “The pace of rig count declines is likely to occur at a pace we have not seen before.”
Worse, some industry executives say, Trump seems either not to recognize the threat or to be unwilling or unable to address it, touting instead his excitement over lower prices for consumers.
“Good for the consumer, gasoline prices coming down!” Trump tweeted on March 9, as the domestic oil price fell by 25 percent.
In POLITICO interviews, half a dozen industry officials who have talked with White House officials in recent days described Trump as slow to comprehend the twin body blows a global pandemic and a price war between Saudi Arabia and Russia would have on an industry he has long supported. Oil prices at $20 a barrel threaten to rain destruction on an industry that has donated $1.8 million to Trump’s reelection campaign and employs hundreds of thousands of people in states key to any hope to beat his eventual Democratic rival for the presidency.
Already, Trump’s favorability is quite low in Texas — 45 percent in a University of Texas/Texas Tribune poll from early February, before the coronavirus crisis — compared to other predominantly Republican states, and he similarly lags in next-door New Mexico, a Democratic-leaning state which he hopes to win.
“The president wants lower gas prices to a point, but this well exceeds that point, and the administration knows this,” said Dan Eberhart, CEO of Canary LLC, a Denver-based oil services firm, and a major Republican donor who regularly speaks with senior White House officials. “The bigger worry for the administration from what I understand is helping an industry that consumers think produces fountains of gold. People that have spoken to the White House – myself included – are concerned that the administration doesn’t realize that the U.S. oil industry will eventually cease to exist at sub-$30 oil.”
The White House declined to comment for this story.
So far, the energy sector has been the target for relatively little direct assistance through federal legislation, compared to the transportation and financial services industries. But most industry executives said they can live with that if the administration exacts diplomatic pressure on Russia and Saudi Arabia to rein in production, a move that, if successful, could raise prices back up and put more cash in the industry’s coffers than a bailout.
Oil prices began falling over the winter when Russia refused to enter a new agreement with Saudi Arabia and its fellow OPEC members to cut oil production to prop up prices. Saudi Arabia responded by saying it would lower its own prices and raise production in a bid to steal market share from Russia and bring it back to the negotiating table. Those moves represented a breakdown in the pact between the two nations that had kept their crude production in check over the past four years — a strategy that had paved the way for U.S. shale producers to move aggressively into the global market.
When the coronavirus started to hit in full force, global demand plunged, sending prices plummeting.
Trump’s first shot at convincing Saudi Arabia that a flood of oil during a global pandemic could seriously hurt the U.S. economy came in a telephone call with Crown Prince Mohammad bin Salman on March 9, just as the kingdom was starting to put its foot on the production gas pedal. A White House spokesperson confirmed to POLITICO the two leaders talked, but gave no indication how the call went.
Two people with knowledge of the call told POLITICO that Trump told the Saudi leader that he was fine with the kingdom’s plans to produce more oil to try to squeeze Russia out of certain markets. He only asked that the coming flood of oil not drive prices down far enough to hurt U.S. producers.
“Keep [prices] low, but keep it viable” for U.S. drillers to remain in business, was Trump’s message, according to a former senior administration official who was briefed on the call. “It wasn’t a difficult conversation. It was just, ‘Hey, want to make sure we’re on the same page here.’ Saudi said, ‘We gotcha.’”
But the size of the resultant wave of oil, which caused prices to drop by more than 25 percent in the two weeks since the phone call, caught the administration off guard, the official said.
“No one thought it would go quite this low,” the person said. “It was, woah, we didn’t think it would get to this.”
At a Thursday press conference, Trump again praised low gasoline prices as a stimulus to the economy, though he noted it would also damage the oil industry.
“It’s like a massive tax increase,” Trump said before correcting himself to mean a tax decrease. “That’s bigger than any tax increase — decrease that you could give. You know, we can give all these big tax cuts, but they’re paying so little for gasoline. But, on the other hand, it hurts a great industry and a very powerful industry.”
That statement gave some in the industry a glass-half-full outlook. One lobbyist who requested anonymity to discuss relations with the White House said that Trump’s even mentioning a possible downside to the collapse in oil prices should be considered progress.
“That’s as close as he’s ever going to get to saying there’s a happy medium on oil prices,” the lobbyist said. “He’s beginning to understand.”
Not everyone shared that view, however.
“‘This is a very powerful industry,’” quoted a second longtime industry lobbyist who requested anonymity to speak candidly about his quarrels with the administration. “What the f— does that mean? Do you understand that you’re seeing an inordinate amount of pressure on one of the largest resources in this country’s economy?”
The only direct federal aid the administration has offered is a plan to expand the U.S. strategic reserve, which would provide a short-term surge in demand and boost in prices. The Department of Energy said it will buy 77 million barrels, an amount for which Senate Republicans offered $3 billion in an aid bill they offered Sunday but which failed to garner enough votes. But even that volume would be a relative drop in the bucket when Saudi Arabia is talking of increasing its own production by more than 3 million barrels per day.
Treasury Secretary Steve Mnuchin’s proposal to spend another $20 billion on buying oil, floated on Thursday, was instantly dismissed as unrealistic as the country is already almost out of space to store it. By summer, oil companies may have to pay customers to take the oil off their hands, Mizuho bank energy analyst Paul Sankey wrote last week.
Instead, Trump will rely on his complicated relationships with the leaders of Saudi Arabia and Russia — the crown prince known as MBS and Russian President Vladimir Putin — to try to preserve oil prices.
Trump might have some success in persuading Saudi Arabia to reduce production, but he has little hard leverage, said Paola Rodriguez-Masiu, senior oil analyst at Rystad Energy. The best option would be to remind the 34-year-old crown prince that Trump stuck by him even after the kingdom’s killing of Washington Post columnist Jamal Khashoggi and its imprisonment of Canadians sparked widespread condemnation.
“The U.S. response to that was very mild in comparison with many other Western nations who were quick to condemn it,” Rodriguez-Masiu said. “The U.S. was in particular silent.”
The former senior administration official said that was, in fact, the administration’s own understanding of its leverage in any future outreach to Saudi Arabia over the oil market war.
“Among this administration, there’s a feeling of, ‘We stuck by you when no one else would,’ ” the former official said. “Who was there when you kidnapped Canadians? Who stuck with you with Jamal Khashoggi? Who stuck with you when you were an international pariah?’”
Trump’s son-in-law Jared Kushner, who has made the Mideast a key part of his White House portfolio, enjoys a good relationship with the Saudi crown prince. But the rest of the president’s team is largely untested, and industry officials openly doubt that he has the right people in place to wring concessions from two countries accustomed to hardball negotiations over oil drilling.
The administration waited until last April to swear in retired Army General John P. Abizaid to the long-empty position of U.S. ambassador to Saudi Arabia. The National Security Council only recently chose Major General Miguel Correa to permanently handle matters pertaining to the Persian Gulf and North Africa, a hire the White House hasn’t formally announced yet.
In recent days, the State Department has stayed in contact with foreign governments to help calm the energy market, a senior department official said in call late Friday with reporters.
“We’ve been engaged, multiple parts of the U.S. government have been engaged, urging greater calm to the market when the economy is facing some real challenges,” the official said.
When asked by POLITICO whether that diplomatic message gets muddied by Trump’s repeated praise for low gasoline prices, the official simply said “no” and declined to elaborate.
In this top-down administration, energy executives are counting on personal appeals to Trump to bolster their cause. But they aren’t sure how to make the approach.
On March 19, industry representatives discussed with administration officials a draft letter asking Trump to redouble efforts to pressure Saudi Arabia to curb production, a person involved with the group told POLITICO. But staff at the State Department suggested sending the letter instead to Kushner instead, as the statement might be “too blunt” for the president, the person said.
At that point the companies threw the letter away, the person added.
In the absence of action by Trump, some officials outside the administration are making their own overtures to influential industry figures outside the United States.
Ryan Sitton, a member of the Texas Railroad Commission, the entity that regulates oil and gas drilling, told POLITICO that he called OPEC Secretary General Mohammed Sanusi Barkindo on Friday and talked to the cartel leader for an hour about how the oil crash was hurting the global economy. Sitton said Barkindo told him that he couldn’t take any official action until OPEC’s next meeting in June.
“I might connect with the Saudi oil minister and the Russia oil minister,” Sitton continued. He also said he talked to White House officials, though he said the Covid-19 response was distracting them from the havoc in the energy industry.
“They don’t have a lot of bandwidth,” Sitton said. “Yes, they know the energy industry is sharing in the crisis, but they’ve got a whole lot of areas that are bigger priorities right now. My objective is to find solutions so when the president does have the bandwidth to move on this we have some options for him to move positively.”