The 11-year U.S. bull stock market is dead, started in the Obama administration, killed by the incoherent response of the Trump administration to the coronavirus pandemic and a crude oil price war between Saudi Arabia and Russia that has collapsed oil prices.
After recovering somewhat Tuesday after a disastrous Monday, the Dow Jones Industrial Average, the index of so-called blue chip stocks crashed again on Wednesday, following the World Health Organization’s declaration that the spread of the novel virus was officially a pandemic. The Dow fell 1464.94 on Wednesday, or 5.86%.
At the same time, Saudi Arabia, in CNN’s description, doubled down on its price war, saying it would not only lower prices for its crude, but would raise production by about a million barrels per day, from 12 MMDB to 13 MMBD. The Washington Post reported, “Oil prices, which had recovered somewhat after skidding 25 percent Monday, tumbled after the announcement. Brent crude, the global oil benchmark, sank more than 2.4 percent to about $36.30 per barrel.
Russia and the Saudis are pissed off at each other over tactics, but they share a common goal. They believe high prices are subsidizing US oil producers at their expense. But the Russians are particularly vulnerable, because their economy is really weak. They went to the Saudis and said, “Let’s lower prices. It will hurt the U.S.”
The Russians didn’t want the bottom to fall out of oil prices. The Saudis can absorb much lower prices, which is why they basically said, “Screw the Russians, we’re going to up production and lower our prices.” That’s where we are now, and the result could be, combined with the coronavirus pandemic, a significant recession in the U.S., according to many experts.
Both Russia and the Saudis hope in particular to clobber U.S. shale oil producers, which have transformed the U.S. oil scene (as well as natural gas). So the Trump administration and oil industry supporters are talking about various measures to bailout U.S. producers from the impact of falling international prices. The U.S. is now the world’s largest oil producer (about 12 MMBD), and has become a major factor in world markets. That was not the case in the 1970s, 1980s, and 1990s. It’s a far, far different world today than it was those “energy crisis” years.
If the heavily-leveraged oil fracking business gets hurt by these moves, which is the intent, the new oil producers could be put out of business, unable to pay their debts, that will leave the former conventional U.S. oil producers kings of the U.S. mountain. That could knock the U.S. back to the bad old days of cartel pricing, as oil prices would surge on reduced supply in the world market,
Really interesting is that two of Trump’s great international buddies, Vladimir Putin and Mohammad bin Salman, are trying to harm Trump’s close friends and supporters — such as billionaire Harold Hamm of Continental Resources. Where will Trump jump given those conflicts?
It’s also no surprise that Trump wants to bail out the hotel industry as well, which has been hit by the coronavirus spread, given his personal business interests. But the administration’s response to the virus has been feckless at best. Trump has personally tried to downplay the threat, while his subordinates, including Vice President Mike Pence, whom Trump appointed to manage the response to the public health threat, have been largely ignoring the blather from the White House.
The Post reported that “the White House is considering a variety of policy changes to blunt the coronavirus impact on America industries, including a payroll tax cut and paid sick leave President Trump is also considering federal assistance for oil and natural gas producers….”
The administration has accompanied none of these proposals with details about how the might work and what the impacts might be. As a result, they have received a skeptical response from both Republicans and Democrats in Congress.
— Kennedy Maize