Saudi Arabia is tanking worldwide oil prices over a dispute with Russia about how to handle the economic turmoil resulting from the COVID-19 epidemic.
The result has been a steep drop in Brent crude prices to roughly $36 per barrel as of this morning—down from $51 at the start of the month and $68 at the highest point this year.
Trading on Wall Street was temporarily halted earlier this morning amid the chaos, but upon reopening, stocks continued to drop.
Local economist Loren Scott says the move will likely push Russia back to the negotiating table in the next two weeks.
“This is very, very costly to the Russians,” and to the Saudis, Scott says. “This is going to hit Russia in the gut, and it’s going to hit them hard. It will hit so hard, they’ll say ‘let’s go back to the table.’”
The Saudis made a similar move in 2014 to try to kill the shale market in the U.S., however that attempt was unsuccessful, Scott says.
“It almost looks like we’re at a race to the bottom, worse than 2014,” Louisiana Oil & Gas Association President Gifford Briggs says.
But Scott says prices will recover—whether that’s in two weeks or 10—and today’s drop is more psychological than the result of actual oil being pushed into the market.
“This can be reversed just as quickly as it was brought on,” Scott says.
Louisiana Mid-Continent Oil and Gas Association President Tyler Gray says he agrees, expecting all industry to keep a close eye on the fall, and potential rises in the market over the coming weeks and months.
“It’s scary; the fact that they’re dropping so quickly, especially with the commodity prices it just shows business is volatile,” Gray says.
Yet there’s some concern prices could drop as low as $20, Briggs says, bringing with it a possible $150 million budget impact.
“That’s not at all where industry would like it to be, and certainly not where Louisiana would like to be,” he says.
On a national scale, lower gas prices mean more money in consumers’ pockets to spend on other things, giving a boost to the overall economy while simultaneously delivering big hits to areas that rely heavily on the oil industry, Scott says.
The price drop will have an effect on the state budget, too. As legislators convene at the Capitol today for the first day of the 2020 session, the state Revenue Estimating Conference has yet to agree on a revenue forecast for the year. The latest price drops are expected to have lingering effects on budget projections.
While oil revenues account for a smaller percentage of the state budget than they did in the 1980s, Scott says any loss is “nontrivial.” A two-week loss is “something that can be handled” vs. a 30-week loss.
The revenues from state severance taxes have already decreased significantly, Gray says, so it’s hard to tell if today’s shock will really be impactful with such extreme fluctuations.
While the state is looking at long-term planning, those in the industry are going to start to question their investments, Briggs says.
“In talking to industry people, I don’t think anyone really saw this coming. We’ve weathered storms before, so reacting on a day-to-day basis doesn’t make a lot of sense,” he says.
For now, the news doesn’t seem to be affecting Louisiana’s natural gas prices, which are already quite low, he says.
All this comes at a time when the Louisiana oil and gas industry was expected to start a modest recovery.
“My guess: Companies are already about as cautious as they can be. I think they’ll just take a deep breath, and watch what happens over the next couple of weeks,” Scott says.
