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International diplomacy may help ease tensions amid oil price war, experts say

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International diplomacy may help ease tensions amid oil price war, experts say

Rather than considering some form of federal assistance to shale producers, international diplomacy may be a more effective tool for the Trump administration to address the oil price war, experts said.

Oil prices plunged this week amid weakened demand from the coronavirus outbreak coupled with an increase in supply after Russia and Saudi Arabia failed to agree on proposed supply cuts. President Donald Trump reportedly is considering some sort of federal assistance to affected U.S. shale producers, some of which may face bankruptcy if the low prices persist.

While it is not clear whether Saudi Arabia and Russia are interested in reaching a resolution anytime soon, the U.S. could serve as a catalyst to ease some of the tension between the global oil players and restart talks on a potential agreement, said Sasha Mackler, who directs the Energy Project at the Bipartisan Policy Center.

"That may be a better focus of the administration's attention right now, rather than thinking through what could look like some relief for the shale producers, because it's not clear exactly what could be done to help them apart from some relief in oversupply," Mackler said.

Calling Russia and Saudi Arabia "monopolistic market manipulators," Mark Mills, a senior fellow with right-leaning think tank the Manhattan Institute, said such diplomatic discussions are unlikely.

"So we want to have a U.S. president sit down with monarchs to collude on how to raise prices for oil?" Mills said. "I don't think so. I think it's a bad idea."

Saudi Arabia could keep its low-cost production ramped up for years to hold down oil prices and drive out higher-cost competitors, Mills said.

"The collateral benefit will be to drive into bankruptcy enough players of expensive oil that it leaves room in the market for the Saudis when demand goes back up," said Mills, who is also a strategic partner with Cottonwood Venture Partners. "They know one thing that you can take to the bank is demand for oil is going to go up more than supply will over the next three to five years. When that happens, the people that have survived will enjoy the market."

Internal factors

Anna Mikulska, a fellow in energy studies at Rice University's Baker Institute for Public Policy, said Trump could potentially pull off a deal between the two nations given his relationship with the Saudis and rapport with Russian President Vladimir Putin. However, there may be internal reasons causing Russia to back away from an agreement to cut supply, Mikulska said. Putin is seeking public approval of constitutional changes that would allow him to remain in office until 2036, so supporting Russian oil producers could be a part of his plan to garner support, Mikulska said.

"These diplomatic relations are great, but they might not work if there are things that Putin is thinking about that don't completely relate to what's happening on the oil market, that he has some other internal motives," Mikulska said.

Saudi Arabia and Russia have scaled back production at times over the past several years to boost oil prices. In response, U.S. shale producers increased their output, lessening the impact of the other nations' cuts and taking over some of their market share. Saudi Arabia has finally pulled the plug, said Jim Krane, a fellow for energy studies at the Baker Institute.

"At some point, that situation was going to end," Krane said. "From a Saudi and Russian perspective, the U.S. shale sector is like a cancer in the oil sector, and at some point, they were going to have to engage in some chemotherapy. Well, they just turned on the radiation."

While Saudi Arabia can produce oil cheaply, the nation will still suffer from low oil prices, Krane said. The oil exporter may hold out until some of its higher-cost competitors fold, but the Saudi Arabian government could face public pressure if it struggles to support the country's social programs or its plan to diversify its economy away from oil, Krane said. A price war could put that diversification program on hold.

The longevity of the price war may boil down to how long the kingdom can afford to continue operating at such low oil prices, Krane said, calling it an "unprecedented" situation, the outcome of which will be difficult to predict.

"I think we're in uncharted territory with this price war because we're having this ramp-up in oil production at the same time that there's a demand shock, right?" Krane said. "We've got this coronavirus that's absolutely killing off travel and killing demand for oil and then you've got the Saudis saying they're going to crank up production."

The White House did not respond to a request for comment about whether the Trump administration was pursuing some form of diplomatic action with Russia and Saudi Arabia.

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