Putin Dumps MBS to Start a War on America’s Shale Oil Industry

(Bloomberg) -- At 10:16 a.m. on a wet and dreary Friday morning, Russia’s energy minister walked into OPEC’s headquarters in central Vienna knowing his boss was ready to turn the global oil market upside down.Alexander Novak told his Saudi Arabian counterpart Prince Abdulaziz bin Salman that Russia was unwilling to cut oil production further. The Kremlin had decided that propping up prices as the coronavirus ravaged energy demand would be a gift to the U.S. shale industry. The frackers had added millions of barrels of oil to the global market while Russian companies kept wells idle. Now it was time to squeeze the Americans.After five hours of polite but fruitless negotiation, in which Russia clearly laid out its strategy, the talks broke down. Oil prices fell more than 10%. It wasn’t just traders who were caught out: Ministers were so shocked, they didn’t know what to say, according to a person in the room. The gathering suddenly had the atmosphere of a wake, said another.For over three years, President Vladimir Putin had kept Russia inside the OPEC+ coalition, allying with Saudi Arabia and the other members of the Organization of Petroleum Exporting Countries to curb oil production and support prices. On top of helping Russia’s treasury – energy exports are the largest source of state revenue – the alliance brought foreign policy gains, creating a bond with Saudi Arabia’s new leader, Crown Prince Mohammed bin Salman.But the OPEC+ deal also aided America’s shale industry and Russia was increasingly angry with the Trump administration’s willingness to employ energy as a political and economic tool. It was especially irked by the U.S.’s use of sanctions to prevent the completion of a pipeline linking Siberia’s gas fields with Germany, known as Nord Stream 2. The White House has also targeted the Venezuelan business of Russia’s state-oil producer Rosneft.“The Kremlin has decided to sacrifice OPEC+ to stop U.S. shale producers and punish the U.S. for messing with Nord Stream 2,” said Alexander Dynkin, president of the Institute of World Economy and International Relations in Moscow, a state-run think tank. “Of course, to upset Saudi Arabia could be a risky thing, but this is Russia’s strategy at the moment – flexible geometry of interests.”The First NoThe OPEC+ deal had never been popular with many in the Russian oil industry, who resented having to hold back investments in new and potentially profitable projects. In particular, Igor Sechin, the powerful boss of Rosneft and a long-time Putin ally, lobbied against the curbs, according to people familiar with the matter, who asked not to be identified discussing private conversations.The Kremlin was also disappointed the alliance with Riyadh hadn’t yielded major Saudi investments in Russia.For several months, Novak and his team had been telling Saudi officials they liked being in the OPEC+ alliance but were reluctant to deepen production cuts, according to people familiar with the relationship. At the last OPEC meeting in December, Russia negotiated a position that allowed it to keep production fairly steady while Saudi Arabia shouldered big reductions.When the coronavirus started devastating Chinese economic activity in early February – cutting oil demand in Saudi Arabia’s biggest customer by 20% -- Prince Abdulaziz tried to convince Novak that they should call an early OPEC+ meeting in response to cutback supply. Novak said no. The Saudi king and Putin spoke by phone ­­-- it didn’t help.As the virus spread and analysts forecast the worst year for oil demand since the global financial crisis, the Saudi camp was hopeful Moscow could be won round at the next scheduled OPEC meeting in early March. The Russians didn’t rule out deepening cuts, but kept making the point that shale producers should be made to share the pain.Putin, who has been the final arbiter of Russia’s OPEC+ policy since the alliance started in 2016, met oil Russian producers and key ministers last Sunday. Russia’s approach was that shale producers should share the pain caused by the drop in demand, cutting U.S. oil production, according to someone who attended.Bad ChemistryAs ministers gathered in Vienna this week, Saudi Arabia made a final effort to force Russia’s hand. They persuaded the core OPEC group to support a deep production cut of 1.5 million barrels a day, but made it contingent on Russia and the other OPEC+ countries joining in. Novak turned up last at the Vienna headquarters where his nervous counterparts were waiting for him, and refused to budge.The crown prince even considered calling Putin on Friday, according to a person familiar with the situation. But Putin’s spokesman made clear he had no plans to get involved. As for the two countries’ oil ministers, there was no personal chemistry between them, according to a person in the room. They didn’t exchange a single smile, said another.With every leak from the meeting the price of oil twitched, as traders slowly came to realize a deal was going to be impossible.Priming the PumpRosneft is delighted with the breakup. It can now move to boost its market share, said spokesman Mikhail Leontiev.“If you always give in to partners, you are no longer partners. It’s called something else,” he told Bloomberg. “Let’s see how American shale exploration feels under these conditions.”But the decision to take on shale could backfire. While many drillers in Texas and other shale regions look vulnerable, as they’re overly indebted and already battered by rock-bottom natural gas prices, significant declines in U.S. production may take time. The largest American oil companies, Exxon Mobil Corp. and Chevron Corp., now control many shale wells and have the balance sheets to withstand lower prices. Some smaller drillers may go out of business, but many will have bought financial hedges against the drop in crude.In the short run, Russia is in a good position to withstand an oil price slump. The budget breaks even at a price of $42 a barrel and the finance ministry has squirreled away billions in a rainy-day fund. Nonetheless, the coronavirus’s impact on the global economy is still unclear and with millions more barrels poised to flood the market, Wall Street analysts are warning oil could test recent lows of $26 a barrel.In Saudi Arabia, where the government is almost entirely dependent on oil to fund government spending, the economic impact will be immediate. Prince Abdulaziz and his half-brother Crown Prince Mohammed will have every incentive to boost production to maximize revenue as prices fall.“Prices will fall until either Moscow or Riyadh call off the endurance contest” or North American production is massively curtailed, said Bob McNally, president of Rapidan Energy Advisors and a former National Security Council staffer.Relations between the two energy ministries remain cordial and the diplomatic mechanisms of the OPEC+ group are still in place, keeping the door open in case the two sides do decide to reunite. Novak told his peers on Friday that OPEC+ isn’t over.But a photo of the conference room after the delegates had left hinted at a different story: The small Russian flag by Novak’s seat had been knocked over. And Prince Abdulaziz left his counterparts with a grave warning: Trust me, he told them, according to a person in the room. This will be a regrettable day for us all.\--With assistance from Dina Khrennikova, Henry Meyer, Irina Reznik and Javier Blas.To contact the reporters on this story: Ilya Arkhipov in Moscow at iarkhipov@bloomberg.net;Will Kennedy in London at wkennedy3@bloomberg.net;Olga Tanas in Moscow at otanas@bloomberg.net;Grant Smith in London at gsmith52@bloomberg.netTo contact the editor responsible for this story: Emma Ross-Thomas at erossthomas@bloomberg.netFor more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.

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A Pandemic Killed Trump’s Grandpa. This One Could Destroy His Presidency.

In May 1918, Frederick Trump—Donald’s paternal grandfather—was taking an afternoon stroll with his young son when he suddenly announced that he felt too ill to continue, and needed to retire to his bed. One day later, Frederick died at home, having succumbed to a case of pneumonia that would later be identified as a complication of the “Spanish flu.” The president’s grandfather, in fact, was one of the first domestic casualties of the world’s worst modern pandemic, which ultimately killed millions. The death toll was undoubtedly worsened by the efforts of President Woodrow Wilson’s administration to talk down the health risk. Sound familiar?Here’s the history Donald may not know, and may not care about even if he does, but which is terribly relevant as he presides over the nation’s response to the fast-spreading coronavirus:With World War I raging, the British, French and German governments downplayed the virus’s spread, fearing negative press might hurt the war effort. Spain, unengaged in the fighting and watching from the sidelines, reported honestly on the disease, leading to the false impression that the virus originated in the country, hence its misleading name. In the United States, Wilson, a Democrat, declared all bad news verboten as soon as the U.S. entered the war. A complicit Congress passed the Espionage Act of 1917, amending it one year later with the Sedition Act, which made criticism of the government a crime carrying a 20-year sentence. Smithsonian magazine notes that “government posters and advertisements urged people to report to the Justice Department anyone “who spreads pessimistic stories…cries for peace, or belittles our effort to win the war.”” He Envisioned the World That Trump Is DemolishingLabor organizer Eugene Debs, a hero of Bernie Sanders, was very quickly made an example of. One month after the Sedition Act took effect, the Socialist party chair and repeat presidential candidate gave an anti-war speech before a crowd of more than 1,200 in Canton, Ohio.“The master class has always declared the wars; the subject class has always fought the battles. The master class has had all to gain and nothing to lose, while the subject class has had nothing to gain and all to lose—especially their lives,” Debs said, later adding, “These are the gentry who are today wrapped up in the American flag, who shout their claim from the housetops that they are the only patriots, and who have their magnifying glasses in hand, scanning the country for evidence of disloyalty.” Weeks later, Debs was arrested and charged under the Espionage Act with “intent to interfere with the operation or success of the military or naval forces of the United States.” He was sentenced to 10 years in jail, though the sentence was commuted two years later by Wilson’s successor. Wilson, who won re-election on the slogan “He Kept Us Out of War,” had created the Committee on Public Information—a wartime propaganda machine—on the suggestion of Arthur Bullard, who once wrote, “Truth and falsehood are arbitrary terms… The force of an idea lies in its inspirational value. It matters very little if it is true or false.” CPI staffers cranked out press releases, often republished word-for-word in newspapers around the country, that ginned up support for the war effort and sugarcoated the situation at home.The consequences of this campaign would be an unknowable number of American lives. In Philadelphia, newspaper editors wary of disloyalty accusations avoided publishing doctors’ warnings about the public health risks of an upcoming parade. Within 48 hours of the event, thousands in the city fell sick with Spanish flu, but public officials continued to insist it was business as usual. “Bodies remained uncollected in homes for days,” researchers at the National Academy of Sciences write, “until eventually open trucks and even horse-drawn carts were sent down city streets and people were told to bring out the dead.”Despite mounting death figures in Chicago, one local public health official stated he would do “nothing to interfere with the morale of the community.” A Wisconsin newspaper that factually reported on the danger posed by the flu was targeted for prosecution by an Army general under the terms of the Sedition Act. President Wilson was even eventually hobbled by the flu in the midst of peace talks. His doctor publicly downgraded the illness to a cold. (Later, Wilson suffered a stroke that left him an invalid, and then fired his secretary of state for convening a cabinet meeting to discuss the health emergency.)All told, the Spanish flu killed an estimated 50 to 100 million people globally, including 675,000 Americans. The Wilson administration’s mishandling of the Spanish flu pandemic—minimizing the virulence of the virus, censoring reports on precautionary measures that might help stint the disease’s spread, and undercounting deaths despite contradictory and observable local evidence—eventually caused a loss of public trust and made the virus yet more lethal. The U.S. response, or lack thereof, to the pandemic that killed Frederick Trump would be a lesson in what not to do regarding coronavirus for any historically literate leader. Unfortunately, we’re stuck with Trump, who from the moment he was elected has been far more concerned with optics than public health. In 2018, the global health security team was essentially made defunct by Trump adviser John Bolton, and public wellness agencies have seen their missions undermined by repeated funding cuts. Even as the coronavirus situation worsens, Trump officials have persisted in efforts to slash more than $85 million from the CDC, and recently announced plans to cover coronavirus costs by slashing $37 million from the Low Income Home Energy Assistance Program, which literally gives heat to impoverished families. Vice President Mike Pence, tasked by Trump with overseeing all aspects of the coronavirus response, not only lacks medical credentials, he wrote in 2001 that “smoking doesn’t kill” and oversaw Indiana’s worst outbreak of HIV, which he then tried to pray away. Last, but not least troubling are the pains this administration has taken to shut down the flow of information about coronavirus, including preventing health experts from speaking to the press without White House preclearance and going after whistleblowers who have spoken publicly about its unpreparedness. Trump, a notorious germophobe who infamously attacked President Obama’s efforts to contain and thwart the Ebola virus, is meanwhile mocking coronavirus concerns as Democrats’ “new hoax”—another bit of evidence that even when millions of lives are potentially on the line, Trump remains all about himself. The president’s flunkies in conservative media have accused Democrats of “weaponizing” the disease to “get rid of Donald Trump,” telegraphing mis- and disinformation that may help turn this crisis into a global disaster. The Washington Post has noted that “Spanish flu had a mortality rate of 2 percent, much higher than seasonal influenza strains, and similar to some early estimates about the coronavirus.” It’s obviously impossible to predict whether coronavirus will rival the plague of 1918-1919, but the failure of the U.S. government to properly address the disease offers a cautionary tale for how the Trump administration deals with coronavirus. Unfortunately, among the many things this administration is terrible at, acknowledging history and learning from past mistakes rank right up there.Read more at The Daily Beast.Get our top stories in your inbox every day. Sign up now!Daily Beast Membership: Beast Inside goes deeper on the stories that matter to you. Learn more.

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