Why U.S. Suddenly Wants High Oil Price

Why U.S. Suddenly Wants High Oil Price

For decades, every American president has pushed OPEC, the oil oligopoly, to do everything necessary to bring the price of oil down. President George W. Bush, campaigning for the U.S. Presidency, made a strong case that as an oil man, he would help Americans spend less in gas stations. The strategy has been this: push OPEC to pump more, and by doing that boost supply. Of course, from elementary economics, other things being equal, when supply increases, price drops, as new equilibrium points emerge.

But that is changing. Now, America wants OPEC to reduce production. It could be confusing – why would the nation which has castigated OPEC for cutting production volume suddenly wants it to pump less? Why should cheap oil be bad in a period when people are losing jobs? It comes down to third party externalities.

Coronavirus pandemic has decimated demand – that is not news. And if that is the only reason, cheap oil would not be a bad thing. But it goes further. And that’s where President Trump is going. Simply, as oil price drops – “West Texas Intermediate (WTI), the benchmark for U.S. oil, dropped 39.09 per cent to $10.98 a barrel on Monday”, a 21 year low, the president is concerned that the U.S. energy sector could be rattled. Yes, huge distortion in banking and asset quality due to exposures to the sector.

The price of West Texas Intermediate (WTI), the benchmark for U.S. oil, dropped 39.09 per cent to $10.98 a barrel on Monday.

Lack of sufficient demand and storage place is the likely cause of the steep fall in price.

[…]

“It hasn’t taken long for the market to recognise that the Opec+ deal will not, in its present form, be enough to balance oil markets,” BBC quoted Stephen Innes, a chief global market strategist at Axicorp as saying

Nigeria’s benchmark crude oil grade, Bonny Light, slumped significantly earlier last week, trading at $12 and $13 per barrel.

Also, the benchmark used by Europe, and the rest of the world, Brent oil, as at the time of this filing is down 6.55 per cent to $26.24 a barrel.

Already, most U.S. shale gas producers are already out of the breakeven price. Largely, the further the price drops, the more the paralysis is, as most of them would go under. And if they go under, banks which had lent them billions of dollars would have underperforming loans. If you scale that from Texas to Oklahoma, balance sheets of banks would take serious hits. One thing the president does not want now is deteriorating assets in banks’ balance sheets!

Oil prices

So, he has a big job: make sure the price of oil goes up, irrespective of his promises during the campaign to keep it low! This is war and closing the flanks is important.

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4 thoughts on “Why U.S. Suddenly Wants High Oil Price

  1. Trump studied Economics, then spent his life in real estate business. So both his academic background and career had a lot to do with modelling and forecasting, in addition to perpetual fluctuations. Most people only see the pompous and loud mouthed Trump, but in terms of foresight and capacity to get things done, give it to the man. He’s not a regular president or politician, those ones don’t know much, so they either attack or tell lies, but never expect them to offer credible solutions anyway.

    The Covid-19 pandemic has thrown all economic principles and market ordinances out of the window, the attack is coming from different corners, the economy is under lock and key. The storage facilities are filling up, cost of production becoming higher than retail prices, and in all of these, you are staring job losses, bankruptcies and underperforming assets. Any leader that manages to navigate all these unscathed will obviously take his or her place in the pantheon of greatest leaders ever lived.

    Ordinary citizens don’t get the full picture, their own is about their jobs and wellbeing, how you go about it as a leader is none of their business. Just do your job!

    Many leaders need prayers right now, the heat is just too much…

    Reply
    1. Repositioning Africans economies in this pandemic will be most trickiest. Leaderder with nepotic underlined perception of the economy will put us in a mess.
      For me the next 1 to 2 years economies in western africa need the informal sector and agriculture to navigate pass these trouble waters ahead.

      Reply
  2. Amb. Paul Ugbede Godwin · Edit

    For a country like Nigeria it’s a big blow on our foreign reserves and generation of FDI in this light would go down the drain, if OPECs operations is not properly handled its the third world countries that will ravage on this downturn reality because there are no plan structures on ground to cushion the effect of this upheaval.
    We need to look inward for diversification but the government is not thinking and pushing on this drive, IMF gave a standing frame of 31 years recession to be experienced in Nigeria but the government are not even concerned by this stipulation. The increasing numbers of debt incurred alone is enough to cripple the economy after the post CoVid 19 era.
    We must act fast if we need a revamped economic sustainability and development.

    Reply
  3. Chinaza Ofobike Nwafor · Edit

    One thing is common with American Leaders, always seeking what they ‘perceived’ will further their nation’s economic status.
    Trump is no ordinary President, he has a name in the world of business and whatever he does we, we can say is from a vast experience of how economies work. Although America’s stance on oil prices at this time has changed from what it used to be, the motive remains same – further American economy. Not every Nation or every president can do that talk more of when it appears so odd.

    Reply

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