The media has been great about reporting on the Federal government paying working Americans $1,000 to help them get through the COVID-19 economic shutdown. They have been great a bout informing those that receive entitlements that they will continue to receive their assistance and in some cases receive extra. For the most part, other than not alerting the public in January about COVID-19 the media has been great about reassuring the public they will be safe during this shutdown. Right down to evictions and foreclosures. But could the media be leaving something out?

Two days ago I asked my Twitter followers if they were comfortable with banks being bailed out again? While opinions varied no one asked me which banks I was referring to? No one asked what reasons any bank would need bailing out this early in an economic crisis. Especially in a strong economy that celebrates energy independence. Even though all the signs are obvious. Such as lowering interest rates multiple times. In a strong economy that is predicted to continue growing interest rates are not lowered. They are raised.

The Bigger the Bank the Bigger the Bailout

I was already very familiar with the oil war between Saudi Arabia and Russia. What I didn’t know is how their bilateral beef affected our shale oil industry. Thus affecting our stock market, investment banks, and our economy in general. A friend sent me an article from  Wall Street on Parade, titled, “Fed Announces Program for Wall Street Banks to Pledge Plummeting Stocks to Get Trillions in Loans at 1/4 Percent Interest”, written by Pam and Russ Martens. That is when I was able to connect the dots between the oil market-share war and the bailout of Wall Street Investment Banks.

On Tuesday, March 17, 2020, the Federal Reserve made an announcement that, with the exception of a few went unnoticed. Although Main Street america would this time receive a bailout, so too again would the Wall Street banks. Again their bailout will amount to trillions of dollars. Under the guidance of Treasury Secretary Steve Mnuchin, the Federal Reserve will open lending to Wall Street investment banks by reinstating the Primary Debt Credit Facility. Which is a bailout program for Wall Street capital banks. I use investment and capital banks interchangeably because these Wall Street banks regularly provide capital for businesses. Which is not a bad thing. The problem comes when these loans are high risk or become delinquent and ultimately the responsibility of the tax payers.

The Facade of  Energy Independence

As with any loan collateral must be given in order to receive a loan. What isn’t typical is a lender accepting previously made high risk loans, and debt incurred by the borrower. In this instance, not only will the Fed accept diving stocks as collateral as they did in 2008, they will also accept other high-risk securities. The same high-risk securities involved in the previous financial crash such as mortgage-backed securities, collateralized loan obligations, and collateralized debt obligations. Once these loans are made the Wall Street banks will be able to move debts from their balance sheet to the Fed balance sheet. Where they can be traded privately. These bailouts called loans are meant to inject money into the economy thus helping the American people. We know from the previous bailout that the money was not injected into the economy. It was injected into the pockets of the bankers in the forms of bonuses and luxury items.

But why do they need a bailout this early into the virus shutdown and, how does the oil war between Saudi Arabia and Russia play into this? Although we have been able to enjoy energy independence as well as being the leader in oil production, it’s how we gained that status that poses a problem. When most people hear of fracking which produces shale oil they think of the environment. They don’t consider the high cost of producing shale oil or where the money comes from to produce it. The shale oil industry relies on constant cash infusions to stay running. Most of which comes in the form of loans from Wall Street banks. This practice is incentivized because shale oil executives aren’t paid based on share holder returns or if the company is making money. They get paid according to oil production. So the more money pulled from Wall Street banks, the more vertical well’s get built and, the more oil pulled from the ground. But, again, the process is costly and shale oil well’s are known to drop in production very rapidly. This is why the shale industry is tens of billions of dollars in debt. A lot of which will be moved from Wall Street balance sheets and onto the Fed balance sheet.

Russia and Saudi Oil War Comes to America

So where do Russia and Saudi Arabia come into play? Once America became the largest oil producer, naturally market shares were taken from Saudi Arabia and Russia who were once ahead of the pack. All was well it seemed until multiple events unfolded. On September 14, 2019 a Saudi Aramco oil processing plant that houses Abqaiq, the most important facility in Saudi Arabia, was hit by drone missiles. The attack cut in half Saudi oil production which is 5% of global production. The loss of production destabilized some financial markets. Prior to the attack Saudi Arabia was producing 9.8 million barrels per day. After the attack production was down to 4.1 million bpd. Enemy number one to the United States, Iran was promptly blamed for the attack. Considering the U.S. and Saudi Arabia are allies with the U.S. even aiding the Saudis in the war in Yemen, the Saudis probably expected the U.S. to retaliate militarily. Instead the U.S. responded with sanctions against the Central Bank of Iran and the National Defense Fund of Iran.

With sanctions being the go-to weapon of President Trump he is never trigger shy. In February 2020 the Trump administration levied new sanctions against Russian state oil company Rosneft. The sanctions were in response to Rosneft selling Venezuelan oil which goes against sanctions levied against Venezuela. Russia anticipated support from Saudi Arabia. Which seemed plausible given that shortly after the attack on Abqaiq, President Trump announced that America was no longer dependent on Middle East oil. However, Russia’s expectation of new partnership was short lived.

In March 2020, Mohammad bin Salman, the crown prince of Saudi Arabia believed he was the target of an attempted coup attack by members of the Saudi Royal Family. In response MBS had Prince Ahmed bin Abdulaziz the younger brother of the king and uncle of MBS, Mohhamed bin Nayef the kings nephew, and Royal Prince Nawaf bin Nayef arrested. Saudi Arabia was becoming unsettled and what happened next would shake the foundation of the American oil market.

COVID-19 Creates the Perfect Storm

China, the worlds largest oil importer and ground zero for COVID-19 began rejecting incoming oil shipments. Followed by shutting down its manufacturing. With other nations soon to follow similarly the ripple effect was inevitable. Less vehicles on the road, planes in the sky, trains on tracks, and less ships in the sea would devastate oil demand. Now Saudi Arabia wanted to play ball with Russia. In order to stabilize the oil industry Saudi Arabia wanted Russia to agree to a reduction of oil production. On two different occasions at OPEC+ meetings to discuss the situation Russia would not agree to decrease its oil production. In response Mohammad bin Salman vowed to increase Saudi Arabia’s oil production to 12 million barrels per day. Even going to the extreme of pulling oil from its foreign reserves. Russia responded by increasing its oil production by 300,000 barrels per day.

Money Ain’t a Thing

In order for either country to balance its budget Russia needs oil to be priced around $42 per barrel and Saudi Arabia needs a price of $82 per barrel. Not only do both countries have large financial cushions that will allow the oil war to continue for quite some time, they also have vast foreign oil reserves. Saudi Arabia has $490 billion in foreign reserves while Russia has $440 billion. Foreign oil reserves allow oil producing nations to pay for imports and their national debts.

Russia and Saudi Arabia have the lowest cost incurred to produce oil. Shale on the other hand is costly to produce and is less profitable. In order to maintain energy independence the shale oil industry will need access to loans to keep from going bankrupt. Russia has long been angered at America’s shale oil production. Once OPEC+ began decreasing its output Russia has felt the U.S. has been taking advantage by filling in what OPEC+ reduced. Their hope now is that the longer oil stays below $40 per barrel it will drive U.S. shale producers into bankruptcy. Saudi Arabia has not said it shares the same ambition in its part in the oil war, but they would no doubt want America to be dependent on Saudi oil again. Some oil experts in the U.S. say the two are working together to bring the American shale industry to its knees. A theory that cannot be dismissed.

To keep Americas position as energy independent and the leader in oil production, shale companies need loans at a preferable interest rate. 1/4% interest is very preferable. In comes the Wall Street bailout. A bailout that will allow them to move debt from its balance sheet and onto the Fed balance sheet. While also providing capital to shale oil and other industries. Some in the oil community were calling on the Trump administration to intervene with some type of government stimulus. As of a week ago, most experts didn’t think government intervention was possible. COVID-19 created the perfect storm to cripple an economy that already had negative indicators, but the oil war was coming regardless. So while the public bailout is in the headlines, as usual its a distraction from what isn’t highly reported.

James Cheef

 

 

 

1 COMMENT

Comments are closed.