The global oil market is in free fall, following the collapse of a meeting last week of OPEC and non-OPEC producers. Saudi Arabia decided to surge its output, sending oil prices tumbling. This historic oil price crash is weighing on stock markets already reeling from the economic effects of the coronavirus pandemic. Low oil prices raise questions about the future of U.S. shale production, OPEC’s credibility and effectiveness, the geopolitical motivations and the fallout for Saudi Arabia and Russia, the fiscal impacts on key oil-producing countries, the implications for the battle against climate change, and much more.

In this edition of Columbia Energy Exchange, Jason Bordoff is joined by three experts who study energy markets, geopolitics, and policy to delve into these complex issues: Helima Croft, Amy Myers Jaffe, and Bob McNally. 

Helima Croft is a Managing Director and the Head of Global Commodity Strategy and Middle East and North Africa (MENA) Research at RBC Capital Markets. She is a CNBC contributor, she started her career at the CIA after earning her PhD from Princeton University. 

Amy Myers Jaffe is the David M. Rubenstein Senior Fellow for Energy and the Environment and Director of the Program on Energy Security and Climate Change at the Council on Foreign Relations. Amy previously served as Executive Director for Energy and Sustainability at the University of California, Davis, as Founding Director of The Energy Forum at Rice University’s Baker Institute, and she is also the Co-Chair of the Center on Global Energy Policy’s Women in Energy Steering Committee. 

Bob McNally is a Non-Resident Fellow at the Center on Global Energy Policy, and Founder and President of The Rapidan Energy Group, a consulting firm based in Washington DC. From 2001 to 2003, Bob served as the top international and domestic energy adviser on the White House staff, holding the posts of Special Assistant to the President on the National Economic Council and, in 2003, Senior Director for International Energy on the staff of the National Security Council. He is also the author of Crude Volatility, a history of oil markets and efforts to manage them, published through the Center on Global Energy Policy’s book series with the Columbia University Press. 



Jason Bordoff:  Hello! And welcome to Columbia Energy Exchange, a weekly podcast from the Center on Global Energy Policy at Columbia University.  I’m Jason Bordoff.  The global oil market is in freefall following the collapse of the meeting last week of OPEC and non-OPEC   producers.  Saudi Arabia decided to surge its output, sending oil prices tumbling.  This historic oil price crash is weighing on stock markets already reeling from the economic effects of the corona virus pandemic. 


Low oil prices raise questions about the future of U.S. shale production, OPEC’s credibility and effectiveness, the geopolitical motivations and the fall out for Saudi Arabia and for Russia, the fiscal impacts on key oil producing countries, the implications for the battle against climate change and much more.  With me to delve into these complex issues today are three friends and experts who study energy markets and geopolitics and policy closely – Helima Croft, Amy Jaffe and Bob McNally. 


Helima is Managing Director and the Head of Global Commodity Strategy and Middle East and North Africa Research at RBC Capital Markets.  She’s a CNBC contributor.  She started her career at the CIA after earning her PhD from Princeton.


Amy Myers Jaffe is the David Rubenstein Senior Fellow for Energy and the Environment and Director of the Program on Energy Security and Climate Change at the Council on Foreign Relations.  Amy previously served as Executive Director for Energy and Sustainability at the University of California, Davis, as founding director of the Energy Forum at Rice University’s Baker Institute.  And she is also the Co-chair of the center on Global Energy Policies, Women in Energy Steering Committee. 


And finally, Bob McNally is a Non-Resident Fellow here at the Center.  He’s the Founder and President of the Rapidan Group, a consulting firm based in Washington DC.  From 2001 to 2003 he served as the top international and domestic energy advisor on the White House staff holding the post of Special Assistant to the President on the National Economic Council.  And in 2003 my old job, Senior Director for International Energy, on the staff of the National Security Council.  He is also the author of Crude Volatility, an excellent history of oil markets and efforts to manage them published through the Center on Global Energy Policy’s Book Series.


Bob McNally, Helima Croft, Amy Jaffe, thank you so much for joining us on Columbia Energy Exchange.  It’s a pleasure to have you with us and get this kind of expertise together virtually on our podcast, since like most places we don’t have in person events on campus anymore, to talk about one of the more historic weeks in the oil market. 


Helima, let me start with you.  You and Bob were in Vienna, you were then in Riyadh, so you saw firsthand what transpired to lead to the oil price crash that we saw begin Sunday night into Monday.  Can you just explain for everyone, how we got to where we are?



Helima Croft:  I think we actually have to take it back about six weeks.  I mean once we started to get the reports about the coronavirus and how destructive it could be to oil demand, Saudi Arabia’s Oil Minister, his Royal Highness Prince Abdulaziz bin Salman, was pushing for an emergency OPEC meeting at the beginning of February.  He essentially wanted to do a very substantial cut, a million barrels plus, to get ahead of the situation. 


From the beginning the Russians blocked efforts to have an emergency meeting and then do a deeper cut.  And so, by the time we got to the meeting that took place last week we were in a sort of standoff between the Russians and the Saudi’s over how to respond to demand impact of the coronavirus.  The Saudi’s pushed forward to the effort to get a deeper cut, they essentially came up with a 1.5 million barrel a day production cut of which OPEC would take one million barrels of that.  And then the OPEC plus producers would do 500 thousand.  From what I was told, they essentially got up to about 1.2 million barrels a day of collective output cuts but the Russians simply refused to kick in the additional 300 thousand. 


And Alexander Novak, the Russian Oil Minister, really showed up in Vienna without any mandate for an additional cut.  All he was allowed to authorize was rolling over the existing agreement till the next June meeting.  Once the meeting ended the Russian Oil Minister went in front of the building and essentially said, not only was there no agreement but as of April 1, it was essentially every producer for themselves. 


And then by the time Bob and I made it to Riyadh the next night, you had the Saudi’s dramatically slashing their official selling prices which is a real signal that a price war between Saudi Arabia and Russia had commenced.      



Jason Bordoff:  So, let me -- Bob I will bring you in in one second but many follow up questions to all of that.  That was a great overview, just help people understand what changed in Moscow, the reluctance to even negotiate, to come to the table and talk about an additional cut that caused the entire agreement to collapse, how has – is Putin thinking differently, is Moscow and Novak thinking differently today about OPEC  plus than they were a month or two ago?   



Helima Croft:  I think what I understood was -- was that it wasn’t so much that Alexander Novak's position, the Russian Oil Minister's position, had changed, he simply had no mandate to offer a cut.  What had really changed was the loudest voice in the room in the decision-making circles, was no longer in Novak or the Head of the Russian Direct Investment Fund, who really saw the OPEC agreement as a way to do trade deals with other key Middle Eastern players.  The loudest voice in the room now is Igor Sechin the CEO of the powerful Russian energy company Rosneft.  Some people consider him the second most powerful person in Russia.  He took a very aggressive stance that the OPEC plus arrangement should not continue and that Saudi Arabia should not get their way on a bigger cut and that essentially the balancing of the market should be done by the U.S. shale producer, not by Russia. 


And so, he became the one, I was told, that really drove this decision on Russia’s part not to participate in a cut.  And it was really aimed at U.S. producers and the sanctions policy that oil abundance in the United States has helped enable.   



Jason Bordoff:   Bob give me a – so let me turn to you to sort of fill in what you would add to that and then your take on that what happened?



Bob McNally:  Yeah, no, just I mean Helima got it right, but Helima and I were at the meeting six weeks ago and there Russia was the complacent one, relax no need for an early meeting, not clear what the effect is going to be, looks like China has this in hand.  Last week though they flipped from complacent to most concerned and our understanding is, Russia went in there thinking this coronavirus thing is much worse than a million and a half barrel a day cut can solve, it’s going to last till 2021.  And Russia thought we need to do cuts ultimately of three and a half to four million barrels a day and that’s what helped Mr. Sechin, to Helima's point, say you know what, throw his hands up, stop right here, we’re not about to go and contribute a third or a quarter or three to four million barrels a day of cuts. 


Let’s have the Americans make the first cuts.  I’ve been arguing – he’s been arguing that for years, let’s have the Saudi’s make the first cuts, maybe they’ll go it alone.  So, Russia saw a problem that was really in their view too big to solve and that’s why I think Minster Novak went to the NA, last week with orders to say nothing but an extension and if not let’s all just go back to everybody produce as much as they want. 


This came as a shock to Saudi Arabia and other producers and then in Riyadh I think Helima and I both got the impression, you know, they are still shocked and – but determined to accept you know the predicament Russia’s put him in.  Which is we don’t have a swing producer anymore, we don’t have an agreement, and in some ways the best thing for Russia to do is to realize, and Mr.  Putin really, that he made a mistake, he made a miscalculation.  They did that in 2014 as well when they thought shale would put an $80 floor under prices. 


Mr.  Putin made a miscalculation he listened to Mr.  Sechin and shouldn’t have, and then the thinking is I think, the sooner we get back to the full free market in oil which is where Russia has taken us, the sooner he’s going to realize he made a mistake cause the price of oil is not going to stop probably at $30 a barrel, it’s probably going to go much lower as we fill every container on the planet with oil and refined products which we are about to do, so Mr.  Putin is going to get a reminder of how quickly the oil market can be destabilized and crash when you have an imbalance like you do now, this huge demand hit from coronavirus plus a big surge in supply as everybody becomes a free market producer. 


And he’s going to learn that is not a world he wants to be in and so the thinking is I think at some point Russia will realize they made a mistake, there’ll have to be some elegant face-saving compromises and they will put Humpty Dumpty back together again and resume cooperating.  But the question is, how low does oil price have to go in equity markets before that happens. 



Jason Bordoff:  And just before I turn to Amy so is that, is what you just said, the calculation that led after on Friday they walk away with no agreement, one approach from the kingdom and other OPEC members can be, well let’s keep talking, let’s see if we can work this out.  Saudi went to a pretty significant extreme to show through their selling prices for crude, they were going to flood the market with crude, pull out of inventories and collapse the price.  Is that what motivated that kind of pretty extreme reaction?



Bob McNally:  No, I think, you know, again to Helima’s point, I think the Russians conveyed a very clear message to Saudi Arabia, the other, you know, 23 members of OPEC plus.  Nothing, we’re not going to cut at all period end of story.  So, I’m not sure talking anymore really would have done anything and the Saudi’s then had a choice, well we can continue to talk but then coronavirus demand collapse is just going to lead to a collapse in oil prices anyway.  


It’s a question of how fast the price would have fallen and so I think the calculation was, well, since Russia has decided and again it’s very important, Novak went out and said, the quota’s end at the end of March right, it’s over now.  I think the Saudi view was sort of a reluctant acceptance of that reality and to say well the best thing now is to show Mr.  Putin what the free market, the unconstrained market that he has wished upon us, looks like. 


And pretty sure that that’s going to get Russia to reconsider, so I think it was more of a reluctant resigned kind of an acceptance of reality given that Russia wouldn’t deal and Russia had more or less said all limits are off starting in April. 




Jason Bordoff:  Just very quickly Helima, and then I’ll turn to Amy, is that your take as well on why Saudi responded the way they did by dramatically increasing production?    



Helima Croft:  I mean absolutely, I see this as a sort of a grim determination on the part of the Saudi’s.  What is different than 2014 is, this is not something that the Saudi’s are looking to do indefinitely.  Remember the previous Saudi Oil Minister Ali Naimi said a couple times, we’ll never cut, I don’t care if it goes to 20, we’re never cutting.  I think the goal of his Royal Highness is to actually get the Russians back to the table. 


What he wants is a deeper collective cut with all participants and so this ends I think when the Russians go back to the table and agree to a deeper cut and so I think that the goal is to try to drive consensus by showing the real implications of letting everyone produce as much as they can.   



Jason Bordoff:  So Amy, you have been watching OPEC for a really long time and now there is OPEC plus an agreement between OPEC and Non OPEC countries notably Russia to cooperate that, you know, to be honest people were skeptical of even when it started because the ability for OPEC to cooperate with Russia for years has been really challenging, Ali Al-Naimi, the former Saudi Oil Minister often said he didn’t trust Russia to even be a partner in OPEC.  Just step back and put this in the context tell us what you have seen transpire over the last week or two and what that means for OPEC as an institution and what it means going forward, is it going to continue to be able to operate effectively.   



Amy Myers Jaffe:  Well I think one of the most interesting things especially what Helima and Bob have so well laid out, is that on one hand this has happened before, it happened in 1986 it happened in 1998 when Venezuela was challenging Saudi Arabia to dominate the market, we just saw of course a similar thing, 2014, 2015 so we have been in this place before where Saudi Arabia  has made a decision, exactly like the decision that’s being discussed today that it might be in its best interest to get other nations to focus in on cooperating by a shock and awe deep drop in the price of oil and in the case of Venezuela in 1998 it cost the existing government at the time their ruling right to operate.  I mean that’s what swept in Hugo Chavez and laid the path for a new kind of OPEC, non-OPEC agreement, so we’ve been here before.  The thing that’s very different is that normally when OPEC and the Saudi’s take on a price war tactic, you know, it takes some time to really shut production and because you’ve got commitments that are already made to drill. 


You’ve got oil production, new oil production in the pipe line that’s hard to curtail, it takes very low prices for more than a month, to get companies to shut in.  So what really normally happens is everybody goes to the gasoline pump and says wow I’m going to take a road trip or businesses say jeez, I’m not going to have these high energy costs in the case of an airline for example I’m going to buy extra planes or I’m going to invest in new equipment or I’m going to hire more people and it has a stimulating effect both on the global economy and on oil demand itself. 


Now the problem is because of Covid-19, it’s not clear that that historical expectation, that the low oil price will somehow bring a bottom to demand, it’s not clear we’re at that point yet and so this is what makes this totally unprecedented in the path of history of OPEC and as Bob alluded to the Russian thinking the numbers involved in how much demand has disappeared, people are starting to assess that it’s higher than the initial one to three million barrels a day that was originally suggested. 


Especially now that we’re considering new bans in Europe and the possibility that we’re seeing for example New York City shut down for large events, you’ve got a cascading effect in the United States West Coast where each day more and more activities are being curtailed.  So, in that case some analysts are saying in a worst-case pandemic scenario which hopefully we will not get to, you’re talking about the disappearance of something like 10 or 12 million barrels a day.  And indeed, when people tallied up loss of goods not being shipped around the world, loss of airplane travel, loss of cities that are no longer having everyday commuters, it does add up to millions of barrels a day and not these smaller numbers that were previously supposed. 



Jason Bordoff:  So that’s really helpful overview and you are right, the sort of combination of a demand shock and a supply shock at the same time is something maybe the late 90s the only other time you could think of, you could sort of say, well we saw something like that.  But let me, there’s a lot of questions to tease out in what you just said.  Let me ask Bob, you closely watch politics in Washington, this president has taken to twitter often to criticize OPEC for pushing up prices and to celebrate low gasoline prices.  Are we going to see that again this time or do you agree with Amy that actually the economic headwinds created by low prices, and the U.S. obviously is a much larger producer today than a decade ago, is that going to dominate?   



Bob McNally:  Oh, what Amy said is right and that’s going to dominate but that’s going to dominate in a phase two, we’re still in phase one which is for President Trump a euphoria as the oil price drops.  A friend of mine was in Florida and said it’s below $2 a gallon there.  So, we’re going to, President Trump has always thought about the oil market through the prism of the consumer at the pump. 


While he champions energy independence and is proud of our net exporter status and so forth, when it comes to oil really he’s a sharp opponent of OPEC as you mentioned Jason and he thinks about it from a consumer perspective and he I think tweeted recently, I had a conversation with the Deputy Crown Prince, Mohammed bin Salman and he thanked him for the low oil.  He said, I’m enjoying the low oil prices, so that’s phase one. 


I think the move from, you know down to it’s about 30 dollars a barrel, he’ll enjoy.  It’s when we go lower and as the reverberations spread throughout the shale patch and the equity markets and so forth then I think the concerns about financial contagion, oil mayhem in our oil patch, the shutting in, the curtailment of production.  I think then he’s going to start to perceive what I think advisors around him perceive, which is the broader -- the down sides and at that point I think there will be more interest in trying to bring this to a conclusion. 



Jason Bordoff:  And let me just ask because you wrote – wrote the book literally on – as well as figuratively on that broader historical context for OPEC, the first book in our Columbia Energy Center book series on the history of oil price volatility, the role that OPEC plays.  So how do you see this in terms of -- we now have a non-member of OPEC which because it has refused to be part of an agreement, OPEC as an entity seems incapable to act.  So, what does that mean for OPEC as an entity and what does it mean for the ability to function going forward.  Is the only way we can have an entity that’s trying to manage the market, when then now is a much larger set of players and if that’s not going to work we don’t have one anymore. 



Bob McNally:  Right.  You know the history shows, to vanquish this sort of natural volatility in oil prices you’ve had swing producers.  Some of them last a long time, like the Texas Rail Road Commission, Seven Sisters for four decades and OPEC from 1972 until – I put the end of OPEC at 2008.  The only game in town since 2008 is been what we call OPEC plus 24 members, 12 OPEC, 12 non OPEC with Russia there, so the real question is OPEC plus going to be a long term successor to OPEC and the Texas Railroad Commission or is it going to go the way of many ad hoc, temporary produce -- as cartels and supplier groups that we’ve seen through history and I talk about in the book. 


And right now, it’s looking like it’s going to, it’s going to go that way, a temporary cartel born in a bust in 2015 and 2016 but ultimately was unable to maintain discipline.  And let’s be fair, the coronavirus does present a huge problem to anybody trying to manage the market and it was a problem probably too big for OPEC plus to handle at least as we sit here today.  So, but lesson of history is very clear, nothing focuses a producer’s mind like a collapse in oil prices.  And a further bust in oil prices is likely to induce producers including Russia to say, you know what we either hang together or we hang separately and impel them to come back to some sort or cooperation.  So, we just don’t have a lot of memory and history of moments like this, to your point and Amy's. 


You know, late 1990s was a close parallel, you had a big demand collapse in the Asian financial crises, and you had a lot of like new supply from Venezuela and Russia.  What was different though is back then we had a swing producer, they just made a mistake and it took a while to fix the problem, what's all the more interesting and dangerous, now is we don’t even have anyone pretending to be the swing producer, they have abdicated.  And so, it’s that which really does make this unprecedented in modern history.



Jason Bordoff:  Helima, you are such a close watcher not just of energy markets but the geopolitical context in which all of this plays out.  I want to ask you about that because we’ve kind of been talking about the strategic choices that some of these producers were making from the standpoint of oil policy, but there is a broader geopolitical strategic context that has always been behind the OPEC plus agreement and I think you probably agree with that. 


And so, given what Amy said about the headwinds is grading for the economy right now that reports that President Trump had reached out to the Crown Prince in Saudi Arabia intelligence reports about Russia’s preferences in the U.S. election, do you think there were going to be some larger forces that might drive people to come back together again including what this might mean for some other OPEC producers.  If you look at Venezuela, Nigeria other countries this kind of price level is going to create significant concerns we have already seen the IMF issue warnings on that. 



Helima Croft:  Absolutely, I mean, we have seen a situation in the past year.  We have seen four Middle Eastern governments fall because of protest over poor economic conditions, poor governance, lack of social services, corruption and so in a low oil price environment, many of these producer governments could be facing real political fallout from these decisions.  And so, I think the question is how do you put it all back together is when somebody decides that the pain is just too much.  I mean the problem for other producers as part of OPEC plus is they are essentially passengers on this journey right now.  I mean if you are Nigeria, if you are a Venezuela, you could be facing even more ruinous circumstances.


And yet, you don’t have an ability to influence the outcome.  I think what's going to be really interesting is the question about how much pain can Saudi Arabia take, they have a much higher fiscal break even they need a higher oil price to balance their budget than Russia, but they have an ability to borrow, they can access capital markets.  Russia may have a lower fiscal breakeven, but they are under sanction, so their ability to borrow is more curtailed than Saudi Arabia. 


And so, I think we are going to get a real test in the coming weeks and months about how resilient these producers are in a low oil price environment.  And I think ultimately, they will be looking to their populations to -- to maintain support of their population.  So, I think the political dynamic is going to very much influence the calculation to the top of the house on how long they want this price war to continue.



Jason Bordoff:  So, who blinks first?



Helima Croft:  I mean, when I came back from Saudi Arabia it was really remarkable to me, it was sort of the -- I would say it was grim determination to see this thing through.  I think that the earliest off-ramp we’re likely to get is the June OPEC meeting.  There had been some discussion about a Joint Technical Committee of OPEC Governors meeting on March 18th through a video conference, that does not look like it’s going to happen.  And so, I do think that we’ll probably going to go to the June meeting, before we get some type of resolution.  I mean in the end I think that the Russians will likely come to the table but nothing is certain right now.



Jason Bordoff:  Bob, you agree with that?



Bob McNally:  Absolutely, nothing is certain.  There was supposed to be this meeting, a Ministerial meeting on June 9th, if – really, it’s going to be determined by I think the equity markets and the price of oil.  If next week we are at $20 a barrel and the equity market is 15% lower, and it’s possible Russia and Saudi Arabia could get together and they could act more quickly.  I think it’s just an endurance test and we have to see when folks are going to come to their senses.  I think it's going to be driven by the transmission mechanism of the equity markets and the credit markets and the oil price reflecting this dangerous situation.



Jason Bordoff:  And the question I guess it – been who is going to cut production and it seems like the answer now might be the United States, so what is this going to mean for what you know, what your view on the bankruptcies we might see in the shale patch, the phase at which at these kinds or oil prices, U.S. shale production will start to decline and when.  Bob, let me start with you?



Bob McNally:  Right, yeah.  As Amy said it's going to be a couple months right.  They have supply equipment, agreements, they have hedge – many producers have hedged although some of the hedges haven’t proven too effective, and they've been a cheap version of insurance that didn’t work out, given the steepness of the fall.  So, I think we’re going to see another few months of relatively flat production and then a nosedive.  We have shale oil now, lower 48 production mostly all shale, down declining at the end of this year by about a million barrels a day. 


And if it lasts another year, we could be down two to three million barrels a day.  So good bye energy independence if you will.  Our imports will start rising again and shale will really roll over.  You’ll see mergers and acquisitions, bankruptcies, Washington will have to decide whether to try to throw the whole life line to the industry with some sort of a floor price or import restraint or just try and help workers in effected industries, how to help and that debate has already started in Washington.


But I think you’re going to see a real nose dive.  Part of the issue is we have a higher base of oil – of shale production, so we'll see steeper declines of the base.  They remember 2014, 2015 this is not the first time, so I think they know what’s coming.  Balance sheets aren’t nearly as firm, so I think again as Amy said, they can maybe have agreements in place and hedging to keep us up for a month or two, but then down we go unfortunately.



Amy Myers Jaffe:  Let me intervene here, I do think that Washington has another option that’s being looked at, and that is what could Treasury or the Fed -- or Treasury or the Fed depending on who leads -- do to stabilize the credit markets for the shale.  And this is very important which we also saw in 2014, 2015 because the high yield bond market, not to be too technical, is represented in a high percentage with some of these shale companies, especially the smaller more leverage companies. 


And so it’s possible that the administration will look at something like a TALF security, something that will allow the banks to off load some of this distressed credit onto its balance sheet temporarily hoping that the oil market will eventually stabilize, something that might have look -- kind of like what the United States did for the car industry, which in the end turned out well.  And I think that that’s going to be important for the administration because as Bob has so aptly pointed out, this is not even just about a few jobs in the oil fields in Texas, this is about keeping the bond market stable and keeping credit flowing in the United States. 


So, I do think that it might not look the same as it did in 2014, 2015 with bankruptcies because I think the banks may wind up hopefully through the administration with a different recourse.  And there are some investors sort of waiting in the wings.  You have savvy investors like Sam Zell and even at one point, I don’t know he might change his mind now, Warren Buffet talking about how they could be bargains in the oil and gas sector.  So, I think that it's still a little early to tell how it's going to play out.  The administration is already focused on it in the following way, they suspended sales of oil from the Strategic Petroleum Reserve, of course those were previously approved as part of a congressional budget deal. 


But I think the administration is also looking at creative ways to think about filling the Strategic Petroleum Reserve.  You have China talking about it might consider filling strategic stocks now that oil prices are very low.  The United States is working on a transaction with Australia to lease space in the Strategic Petroleum Reserve, because Australia is lacking reserves today.  It used to be an oil exporter now it’s an importer and so therefore it has to change its practices.  So there is some creative things, I mean years ago, the United States looked at leasing space in the Strategic Petroleum Reserve to like Saudi Arabia or Mexico and we probably could use some sour crude in the Reserve because some of the consolidation has made us a little sparser than we should be in this very sour crude that a lot of refiners use on the Gulf Coast.  So, I think the administration is looking at creative things and not just things like a floor price which typically don’t work.



Jason Bordoff:  Helima, let me just bring you in on this question of how -- what you see in the financial sector and what it's going to mean for shale producers, shale production, but also put this in context for listeners in the longer term.  Shale is short cycle supply, when the price falls you can lay down rigs and production will fall quickly, but the resources are still there.  Do we just see consolidation, eventually a deal comes back together, markets balance and then shale starts growing again?  Is that just sort of the inevitable cycle or is there something – does this permanently impair shale in some way that changes the dynamics we’ve seen the last ten years.



Helima Croft:  Well, what’s really interesting is when Bob and I were in Saudi Arabia, one of the things that was said to me at least was the view that you can’t really permanently price out shale, that there will be consolidation, that this is something you have to make room for.  But I think from the financial services perspective, if you think about there was a lack of investor enthusiasm with shale even before this whole price war erupted, people look at the amount of capital that had been destroyed. 


And so there was a -- the sector was already out of favor.  And so, I am concerned about, you know, after this whole Saudi price war episode, what does it mean in terms of the desire of investors to really come back to the sector.  There had already been the sort of looming headwinds about, you know, ESG investment, the climate change agenda.  And so, I do think that this could potentially be just one more headwind facing the industry.



Jason Bordoff:  And can you say one more word you mentioned, you know, I think it was you, Saudi’s ability or maybe it was Amy, Saudi's ability to borrow and there is a lot the fiscal runway that –



Helima Croft:  Yes.



Jason Bordoff:  When you say who is going to blink first.  Talk about what you see in Saudi, what you see in Russia, and how that’s going to, how the -- how will that inform who blinks first.



Helima Croft:  I mean we are already getting reports that the Saudi’s are preparing budgets based on $20 oil price, a $12 oil price.  They are apparently preparing, you know, pretty significant budget cuts.  Now what Mohammed bin Salman has been able to do in terms of, you know, his rule the last couple years is give his population tremendous social freedom, while promising them a big economic dividend in terms of Vision 2030. 


It looks like that economic dividend certainly won’t be coming in the near term because of this price war.  But I do think their ability again to borrow means that they do have runway to make it work, you know, over the next months.  I think the interesting question is on Russia, because the Russians have talked a very big game about how diversified their economy is, that they have a lower fiscal breakeven, but we also know they have substantial military expenses in places like Syria, Crimea is not an expensive -- inexpensive acquisition, Eastern Ukraine and again there are sanctions that do limit their ability tap you know, debt markets.  So, I do think it will be a very interesting show of strength that we are going to see and I think we will get a lot of insights again into how resilient these economies are, if this price war continues through the summer into the fall.



Jason Bordoff:  You mentioned this broader Vision 2030, the ambitious economic reform that the kingdom has undertaken, we saw Khalid Al-Falih the former Oil Energy Minister very well known and highly regarded in sort of international circles come back in as a new Minister of Investment.  I think people saw that maybe as a sign of concern that this economic reform is not proceeding at the pace that the royal court wanted.  Does that come into tension with trying to get into a price war now?



Helima Croft:  Well, I think that they are little bit on separate tracks with Khalid Al-Falih's return.  I think there had been concern about the lack of foreign direct investment in the kingdom, and Khalid Al-Falih has been a tremendously successful brand ambassador for Vision 2030, I think of him almost as the MacGyver of Saudi Arabia, he has been Oil Minister but previously he had been Health Minister as well.  And so, I think putting him in charge of that portfolio is part of the effort to really draw in foreign investment.


But in the near term, having the lack of cash that a higher oil price gives the government means they may not have the type of flexibility to, you know, provide the type of social services that their populations really want.  And again, I think that, Mohammed bin Salman has been very successful in pushing forward with a social agenda that lines up with what young Saudi’s want and so he may have a reservoir of good will amongst young Saudi’s that can see him through this crisis.  Again, it will all depend on how long the oil price downturn last, but we will learn a lot again about how strong these governments are in the next couple months.



Jason Bordoff:  Amy, the view that this might go on for a while which I think is what we are hearing, what does a sustained period of low oil prices, and we can talk also about what it means for natural gas prices, what does that mean for the clean energy transition?  Does this undermine the economics of alternatives like electric vehicles or does it -- what are the other impacts that it has?



Amy Myers Jaffe:  Well, I think we have to start first and foremost thinking about credit markets.  So, you have a place like Europe which has just announced, the EU, a one trillion-dollar initiative to have an independent battery operation for electric cars -- everything from mining to processing to the actual battery development.  And that ambition can become much harder to perform if you have a failure in credit markets in Europe or even just a great constraint that might come as a result of the programs that have to be put in place post the corona crisis. 


So, the question will be, will the stimulus packages focus specifically on green energy, what will China do about its green energy when it -- again when it goes to re-stimulate its economy.  Some of those things I think will matter a lot.  On the competition between renewables and this very low natural gas priced world, I think that renewables are starting to get to the point where they honestly can compete well. 


And so, one factor will really be not so much the technology competition per se or cost competition per se, but really who has access to credit and who doesn’t?  And as Helima I think it was and Bob have both mentioned, right, this question about how the markets will feel about who to invest in, you know, are institutional investors so inclined ESG and sustainability practices that it might be easier for a large company that does investments in renewables to find capital in the post corona world than an oil and gas shale company or even the oil majors, I mean, I think that sort of open question at this point, but absolutely having companies like a Shell and BP have lower cash flow is going to constraint their ambitions probably in both directions, both oil and in the new push to renewables. 


Now in terms of EV’s, I think that’s a tougher thing.  Bloomberg New Energy Finance is saying, no, you know, trains left the station.  Today, we had an announcement from Volkswagen saying, listen we are converting our manufacturing to EV’s and we are committed.  The problem is you know, on the consumer level in California they were already having trouble getting people to buy the vehicles. 


And so that leads to the question of you know, what is the pass forward, do we get bigger companies like either in the trucking industry or in the ride hailing industry, go electric and that creates the market?  I think there is a lot of uncertainty now that might have not have otherwise happened.  I think, if you were doing a podcast with me a month ago, I would tell you that these technologies were really, really taking off.


Now I think, there is a lot of uncertainty, and the fate of credit markets, I think it will be a very material influence. 



Jason Bordoff:  And I just had one observation to my own which is I think when you look at the impact of an oil price collapse on the transition, it's important to look at the reason for the oil price drop and so part of that is the supply surge we have been talking about, but part of it is the severe economic contraction as a result of this terrible pandemic. 


And I think if history is teaching anything -- has taught anything, countries like China and others it’s that when there is significant concern about the economy and an economic slowdown that tends to slow the pace of ambition in countries around the world for climate policy.  Just quickly Bob -- I assume this in the U.S. at least, reduction in U.S. oil production, would mean less associated gas production and we’ll see natural gas prices rise, or is that not the right way to think about it.



Bob McNally:  Well, I think, no, that’s right, we do especially in the Texas we just produce a lot of gas unavoidably.  And it's getting to be such a problem that you know, you wonder if it wasn’t going to be this, some sort shock to the oil industry, it might have been the regulators, because that gas is being flaring, flared.  And that flaring is becoming more and more controversial and you have seen some really rumbling, even inside the Texas Railroad Commission with regards to issuing the permits for it, so, you know that was becoming a problem, but this will help that to the degree we’ll be accelerating a lay down of rigs, probably could lose -- half our rigs could shutdown.  And we see those big declines, you will be pulling less gas out of the ground, flaring less gas and the price of gas you know, should rise.


I think it's interesting about the price of gas, it's falling to well, zero or below zero in Texas, for quite a while, we just have too much.  That’s interesting in the context of oil, because I don’t think anyone believes oil could fall that low.  And I think that’s wrong, the price of gas you know, fell to negative and I think the price of oil could fall to zero, where it basically the message is if you lift a barrel of oil out of the ground, we will -- you destroy value, and will penalize you financially, because there is no where above ground to either consume it or to store it.


And that’s what we are kind of looking at, as you have the combination of this demand collapse and the supply surge, these two black swans if you will.  That is what we are looking at in the coming months to quarters here unless someone calls it off, but in terms of natural gas yeah, that’s one commodity at least in Texas, that you see the price go up.



Jason Bordoff:  So, let me, well just about out of time I could talk to you guys for hours this is super -- super interesting, but let me close by kind of putting you each on the spot, I know crystal balls are hard in this space right now, both Saudi and Russia are dug in it seems into their positions, Bob, just expressed a view on what that could mean for how dramatically the oil price could continue to drop even from where it is now, can you just say a word about how long you think this will last and what you think could bring parties back together at the table and how long it might take before we see that happen, let me start with you Helima?



Helima Croft:  Again, I think June, you know the June meeting could be the sort of earliest off ramp we see.  I do think it's going to all come down to really the decision making calculus in Moscow, I mean, there are people in that government that pushed for continuing with the agreement with OPEC, who had advocated making a deeper cut and the question is will those voices become ascended -- could someone like the Head of the Russian Direct Investment Fund, could he became a louder voice in the room, the CEO of Lukoil apparently had wanted to continue with the agreement, had wanted to continue the working arrangement, he has gained access to upstream acreage in Abu Dhabi, so he's incentivized to want to continue to work with these OPEC countries, if those voices become louder and the carnage of the price war becomes so high for Russia, I think then we will get the change and we will get them back to the table.



Amy Myers Jaffe:  Well, I think we have another wild card as well I like what Helima said but you know, the Russians were very focused on the sanctions on Rosneft and of course Igor Sechin worked about their feelings about this back in -- speech he gave in October to the Eurasia Forum.  So, I think the one interesting thing that I noticed is that Treasury Secretary Steve Mnuchin put out a press release the first day, talking about needing orderly energy markets and has meeting with the Russian Ambassador and you have to wonder if these sanctions against Rosneft and some of these other negotiations with the Russians on a variety of things, might be part of what is going to take place behind the scenes to get us to something that where everybody agrees that a meltdown in credit markets and so forth like we saw in 2009, is in no one’s interest.



Jason Bordoff:  Yeah, it's an interesting point, we didn’t really get into it too much, but you know, Richard Nephew here at the Energy Center has been writing for sometime about the potential unintended consequences of the overuse of sanctions and there has been a lot of reporting that one of the things that made Putin inclined to try to impose paying on U.S. shale was his anger with the use of sanctions on things like Nord Stream 2 and Rosneft trading arms.  Just a quick follow up on that Amy, and do you have thoughts on how Moscow is viewing, on the one hand, what its posture toward the U.S. is right now, is it trying to hurt the U.S., help the U.S., the Trump Administration?  There’s sort of different narratives out there about what its interests are with this administration and with the United States right now.



Amy Myers Jaffe:  Well, I think you have two anxiety rating things, the first one is if you are Russia, and your economy is going to be wrecked by this maybe you don’t have any interest in seeing anything other than a global financial crisis that hurts the United States, so that’s a concern.  I think the Trump Administration has highly focused on that so, that’s point one.  Point two is that in great Putin style I like what the speakers before have said, I mean maybe Putin made this great miscalculation about how Saudi Arabia would respond.  This is not the first time that Saudi Arabia has put a lot of oil in the market at the same time as coordinating diplomacy with the United States.


So, I think the real question is going to be what is it the Russians are looking for from the United States itself and maybe not even from OPEC plus and where is the line here on making sure that Russia isn't rewarded for doing things that are not in the U.S. interest, but on the other hand, understanding that we are a global community, we are in the middle of a global health crisis and one has to be flexible in thinking about solutions to problems and I think the dialogue between the United States and Russia will be an important part of that.



Jason Bordoff:  Bob, let me conclude with you to make your own prediction about when and how this ends.  Is the best cure for low prices low prices, and we just let the markets rebalance or do you think they can -- OPEC plus can put things back together again?



Bob McNally:  Well, I will sign up with Helima, I think by June, we’ll have had enough pain all around that you will start to see negotiations start.  But in a way, you know, it's the end of the beginning, not the beginning of the end at that point.  And I have to say I think the Russians in some ways were right, the problem is bigger than a one and a half million barrel a day headline cut, that was being discussed last month.  And in a way it is like 97, 98 only worst in that we are probably going to need rounds of cuts, successive cuts to really claw out of this given the enormity of the demand collapse.


So, but I think damage, enough damage will register here as we get into April we see more discounting, people start putting more on the market at cheaper prices and everybody gets in the game and the war really gets to be a free for all, I think at that point the damage will be sufficient and you will see negotiations in the beginning of a claw out by June.



Jason Bordoff:  Great, well, I wish we had more time.  This clearly I think when people look back and write about energy market history, OPEC history, maybe the next version of your book, Bob, this is one of those moments that people are going to study for some period of time to come so, it's a privilege to be able to reach out to the three of you and have a chance to talk with you about it, a privilege to count the three of you as close friends. 


Thank you Helima Croft, Amy Jaffe, Bob McNally, for joining us on this episode of Columbia Energy Exchange.  For more information about the podcast or the Center on Global Energy Policy visit us online at or follow us on social media @ColumbiaUEnergy.  Thank you again for listening, we’ll see you next week.