Why Is Gas So Cheap Right Now? … and it isn’t Because of COVID-19

retail gas price in New York City March 31 2020We have received several comments from readers and friends saying that they expect gas prices to stay at this historical low rates because COVID-19 (see our new videos: How COVID Ends and COVID vs Spanish Flu vs SARs vs MERS) will likely drag out low demand for many months or even years.  In Calgary you can buy gasoline at just $.58/liter and in New York, you can get it for as low as $1.69/ gallon!

It is common sense the that demand for all energy products including gasoline and diesel have tanked out (pun intended) causing gas prices to fall, but there is MUCH more at play here.

The vast majority of the collapse in the price of fuel has been caused by Russia starting a global price war to both “let the Saudi’s know who is in charge” and to crush the US and Canadian energy markets.

Specifically, Saudi Arabia wanted the OPEC+ alliance (the + is Russia) to cut production by 1.5 million barrels of oil per day in an effort to maintain prices during the COVID crisis. But Vladimir Putin saw this as as the ideal time to make a stand, and he refused the cut.

The last straw for Putin was additional US sanctions against the Russian state controlled oil company Rosneft for continuing work with the Venezuelans while Venezuela is under sanctions. He not only refused the production cuts Saudi wanted, Russia announced they would INCREASE production by .5 million barrels per day.

Mohammed Bin Salman Vladimir PutinPutin understands that his country could withstand crushingly low oil prices much longer than Saudi Arabia can because Russia has two things going for it:

  1. a much more diversified economy than Saudi Arabia does
  2. a floating currency which effectively insulates the Russians from the worst of the price cuts. Saudi has a fixed currency and when the price of oil drops they feel it on 1:1 ratio

Saudi’s petulant new leader Mohammed Bin Salman (MBS) is not know n for admitting mistakes or correcting his course of action once he has announced it. So much like Donald Trump would, he doubled down on his losing poker hand and along with the UAE has insanely added an additional 2.6 Million barrels per day.

All tolled we now have an estimated 4 MILLION barrels PER DAY being over-produced.

Unless something drastic happens, and it might, it is clear that Putin is going to be the winner in this battle. He is going to:

  • russia saudi bankrupt us shale oilcrush US and Canadian oil producers who typically need $30 or more per barrel to survive
    • Russian and Saudi produce oil at about $3/barrel so they are both making good money even at the $20-ish/barrel we have seen in recent months
      US and Canadian investors have lost interest in back stopping Canadian and US producers in the hopes of big future returns that are likely to never come
  • teach Saudi’s MBS a lesson
  • take market share

This penis measuring, high stakes business brinksmanship by Vladimir Putin and poor Saudi leadership is what has caused the collapse in oil and therefore gasoline prices.

The Russia-Saudi price war will end with a bang and prices will spike back up to their normal $45 per barrel / $1 per liter / $2.5/ gallon within a few weeks.  That could be tomorrow or it might be in November but it is not likely last into 2021.

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