Oil EconomicsI should have learned in undergraduate economics that the high-cost producer in an industry sets the price but makes no profit. But it took a strategy seminar at business school with a consulting firm to make me realize the power of the concept.
So the Saudis and Russians are trying to drive the US shale producers out of business. But they just have to drive the price below the shale producers costs and the US production will gradually shut down. Rational actors would keep the price just under the US costs, not drive it to US$20. Then the Saudis would allow the price to rise so the very lowest cost US producer was making money and the Saudi's would pump the rest (at their highest possible profit).
Instead, the Saudis seem to be trying to drive the Russians out of business. By doing this, they are adding instability to investment markets already rocked by COVID-19. That is probably giving the Saudi Sovereign Wealth Fund some mark-to-market problems and liquidation problems. Since Saudi Arabia needs to sell part of the fund to make up lost oil profit, they are defeating their ability to maintain the price war. Time for this price war to run is maybe shorter than we think.
Further, to keep US Shale off the market, Saudis need to keep the price low FOREVER. Because the current US oil producers may go bankrupt, but the fields will be sold to someone else, giving them really low cost-base. As soon as the Saudis raise the price back to a more profitable level for Saudi Arabia, the new US field owners will restart production.
Finally, if Putin really wants to elect Trump, I assume that bankrupting the entire state of Texas might cause Trump some lost votes. I bet Putin also wants this to end.
One final thought: This seems like predatory pricing by the Saudis. If a Canadian company did that, it would land them in jail. Maybe Canada and the US could get together and erect a $50/Bbl tariff barrier around the North American continent. It is strategic to have a domestic North American energy industry, which cannot be held hostage by hostile foreign governments. Besides, the US loves tariffs.