Donald Trump has a bit of a problem on our hands. It is not a question of the COVID-19. It is oil prices that are too low. Too low to ensure the survival of many american companies in the sector.
It is even questionable if Trump does not want a war with Iran, so that prices rise, and oil extraction in the United States become profitable. It is, in any case, the impression of his declarations of war of the last days, when he was given orders to american naval vessels that cruise in the strait of Hormuz to destroy the boats the iranians who the harcèleraient.
1. Why the oil prices have fallen sharply ?
Oil prices have fallen considerably for three reasons. First, the crisis of the sars coronavirus has made a lot of falling oil demand. In fact, 40 % of oil demand comes from the transport sector. With the quarantines that are increasing across the world, people who can work from home. Almost nobody trip. Then, Russia and saudi Arabia agreed to increase production to bring down prices, in order to cut the ground from under the feet of their competitors. Thirdly, the storage tanks of the oil in the world are folds to 82 % of their capacity. There is therefore practically no more space to receive the oil production to come.
2. When the price of a barrel of oil are they viable for american companies ?
Less than 20 u.s. dollars per barrel, prices are well below the costs of production and drilling of new wells. In order to be profitable, the mining companies in u.s. must have a price of around $ 28 per barrel. For that they engage in new drilling, the price should be about $ 50 per barrel.
3. Is it that Trump is going to help the american oil companies ?
Donald Trump doesn’t want that us oil companies are bankrupt. This industry accounts for about 6 % of the jobs in the United States and 8 % of the GNP. He will probably ask Congress to help and may be tempted to restrict imports of oil. But the economic aid that the u.s. Congress has granted up to this already accounts for the equivalent of 13 % of the GNP of the us. It is the double of the aid that the american government had released during the crisis of 2008. All that money that is borrowed, is expected to generate a lot of inflation in the long term, which would help to repay the debt. The problem is that in the short term, low oil prices depress inflation.
4. What might be the consequences of greater debt ?
In the context where many States are heavily indebted, and where republicans refuse to increase taxes on businesses, the United States will lead to cuts in services and a choke tax of the middle classes. Or, the States will receive financial help from the federal government, which will increase the us debt…
5. What would be the consequences of a war with Iran ?
A war with Iran would have unpredictable consequences on the whole of the Near and Middle East. In the short term, such a war would drive up oil prices, in particular if there is blockage of the strait of Hormuz. In this case, 14 % of the world production of oil could no longer flow.