Page 25 - ARUBA TODAY

BUSINESS Tuesday 10 March 2020
A25

AP Explains: The oil market meltdown and its global impact

By DAVID McHUGH FALLING? take a lot of U.S. capacity
AP Business Writer A: First came the corona- offline and thereby remove
FRANKFURT, Germany (AP) virus outbreak, which re- U.S. producers as a source
— A clash of two oil titans duced travel and transport, of competition. The other
- Saudi Arabia and Russia sharply reducing demand thing that is on their mind
- is sending shock waves for fuel. The international in all this is that if they cut
through energy markets, Brent benchmark had fall- then that will also primarily
with wide-ranging implica- en from $69 at the start of benefit U.S. producers."
tions for consumers and the year to around $50 last "So they've decided they're
oil companies, including week. going to take some short-
those in the No. 1 produc- Then came last week's term pain in order to inflict
ing country, the United meeting between OPEC damage on one of their
States. and non-member coun- major competitors," Ads-
The spat between these vi- tries. On the agenda: a head said.
tal oil suppliers comes at a production cut of 1.5 mil- Stephen Innes, chief mar-
critical moment; the coro- lion barrels a day, or about ket strategist at financial
navirus outbreak is squeez- 1.5% of global production. services firm AxiCorp., says
ing economies around the The idea was to keep pric- In this Thursday, Aug. 31, 2017, file photo, a flame burns at the Russian President Vladimir
Shell Deer Park oil refinery in Deer Park, Texas.
globe to the point where es from sagging even more Associated Press Putin may also have de-
world oil demand is fore- as demand is expected to cided to hit back at the
cast to shrink in 2020 for the fall this year. Saudi Arabia, Second, Saudi Arabia may for their state budgets. But U.S. industry after Washing-
first time since 2009. the world's No. 2 oil pro- hope that the pain of low Russia says it can balance ton placed sanctions on
Oil prices fell Monday by ducer, wanted No. 3 Rus- prices will force a Russian its budget at around $42 Russian state oil company
the most in one day since sia and other nonmembers rethink. "Saudi Arabia has a barrel for its own bench- Rosneft for marketing Ven-
the 1991 Gulf War. The price to take 500,000 barrels per de facto launched a price mark crude. Saudi Arabia, ezuela's oil.
of U.S. crude fell as much day of the cuts. Since 2016, war against Russia, promis- whose economy is less di- Q: WHAT DOES THIS MEAN
as 34% to $27.34 a barrel, a the Saudis and the Russians ing to sell its oil at a discount verse, needs more than $80 FOR US PRODUCERS?
stunning drop for one day have worked together on in order to maximize its oil per barrel, according to A: The current low prices
and the lowest price since production issues. revenues," say analysts at the International Monetary could constrain activity in
early 2016. But this time the Russians UniCredit bank. "It appears Fund, even though its costs the American shale oil in-
The decline followed Rus- balked. They refused to join Saudi Arabia wants to ce- are much lower than Rus- dustry. A downturn in oil
sia's refusal last week to new cuts, or even to extend ment its position as the sia's. prices in 2014-2016 hurt
join the OPEC oil cartel in previous production cuts world's top oil exporter and What Saudi Arabia has companies in places like
proposed production cuts that were due to expire at to persuade Moscow to done is to send prices so the Permian Basin in west
aimed at supporting pric- the end of March. And the return to the negotiating low that both will feel a seri- Texas and eastern New
es. Thwarted in its search Saudis hit back, telling cus- table." ous crunch. Mexico. According to the
for cuts, Saudi Arabia, the tomers that they were go- ___ And Russia may have a lon- Federal Reserve Bank of
leading OPEC member, ing to ramp up production Q: WHAT'S BEHIND RUSSIA'S ger-term target: the U.S. oil Dallas, $50 per barrel is the
sharply changed course and slash prices for Asian REFUSAL? industry. price at which it becomes
over the weekend by cut- customers. A: Russia may have seen no "The Russians are doing this profitable to drill a new well
ting prices and signaling it ___ point in cutting production out of long-term strategic in the U.S. Large producers
will ramp up production. Q: WHAT IS SAUDI ARABIA'S only to lose market share as considerations," said Tom such as Exxon have already
Here is a look at the oil GOAL? U.S. shale producers in Tex- Adshead, research direc- scaled back with prices at
price war and what it could A: First, protecting market as and New Mexico take tor for the Macro-Advisory $50 a barrel. In Texas, the
mean over the longer term share. Both Saudi Arabia up the slack. Analysts say consulting firm in Moscow. number of active rigs fell
in the industry as well as and Russia have seen U.S. Saudi Arabia may be un- "Their view is that by do- from 553 in October 2018
for consumers at the gas producers take a chunk derestimating Russia's abil- ing this they can damage to 398 in January 2020.
pump. of their market, and falling ity to weather low prices. the financial health of U.S. Around the same time, the
___ prices help keep customers Both countries are heavily shale-oil producers and oil industry in Texas shed
Q: WHY ARE OIL PRICES on board. dependent on oil revenues that by doing this they can about 14,000 jobs.q