While the broader American economy grapples with the coronavirus pandemic, the energy sector is in freefall. Oil prices have plummeted nearly 60 percent in just a month. Benchmark prices now hover at just $22 per barrel, a level at which American energy companies will hemorrhage cash. But the virus alone is not responsible for the carnage in the energy markets. Much of the blame lies at the feet of Crown Prince Mohammed bin Salman of Saudi Arabia, who recently launched a price war that may cripple one of America’s most innovative industries.
For the last several years, Saudi Arabia and Russia have cooperated to hold down oil production and bolster global crude prices. Earlier this month, with demand softening as a result of the coronavirus, the Russians hesitated to agree to further cuts.
A frustrated bin Salman responded by slashing the price of Saudi oil and ramping up production, a move designed to launch a price war on competing producers. While the target of bin Salman’s ire was Russian oil companies, the move is guaranteed to accelerate America’s economic collapse. It also appears unlikely to be effective: Russia, with ample foreign currency reserves and an economy with a lower break-even price, is thought by energy experts to be able to bear the pain for much longer than the Saudis can.
In the United States, falling oil prices have caused panic in energy markets. Texas oil executives last week took the unprecedented step of asking the state regulator to intervene in the market and forcibly limit production. Something similar last happened in 1931, but in reverse. As Texans faced down the twin perils of the Great Depression and cratering oil prices, Governor Ross Stirling sent in the Texas Rangers to shut down drilling. The state saved the industry and the wildcatters lived to fight another day.
Their heirs would go on to invent hydraulic fracturing. But the frackers—who need higher prices than state-backed Russian and Saudi oil producers do to turn a profit—may not survive this crisis. One prominent industry CEO predicts that as many as half of the U.S. oil companies could go bankrupt in the next two years. As layoffs mount in Houston, Pittsburgh, and rural shale basins, past crises point to a bleak future. During the downturn of 2014-2016, the U.S. shale economy shed 200,000 jobs. This time promises to be worse.
Shale oil and gas production is critical to the overall U.S. economy. No longer are low crude prices purely a boon for consumers at the gas pump. Energy production accounted for 10 percent of U.S. GDP growth from 2010–2015. Until this most recent crisis, the energy sector provided more than 400,000 jobs. In many areas of the country, oil companies have stepped into the breach left by the departure of manufacturing. They provide something increasingly rare in the heavily financialized American economy: dignified, skilled work upon which a blue-collar earner can support a family, purchase a home, and send children to college.
This is all the more frustrating given that for three decades, America has repeatedly come to Saudi Arabia’s aid. U.S. troops, 700,000 of them, kept Saddam Hussein at bay in 1990 and then crushed Iraq’s army in the Gulf War a few months later. In 2015, former U.S. President Barack Obama backed Saudi Arabia’s bloody, failed intervention in Yemen, providing vital support to the Saudi military. (Saudi forces have failed to defeat Yemen’s Houthi rebels, strengthening Iran’s position in the process.) And though President Donald Trump has thus far refused to go to war for Saudi Arabia, he has deployed thousands of U.S. troops to bolster its defenses. It is an open question whether the Saudi monarchy would still be ruling today without U.S. patronage and protection.
Yet the Saudi regime that America protects is now erratic and impetuous — the worst kind of junior partner. Since the young Crown Prince Mohammed bin Salman began his ascent five years ago, hubris and recklessness have become the hallmarks of Saudi decision-making, at home and abroad. Imprisoning and shaking down their own princes, kidnapping foreign prime ministers, and finally, in the judgment of the CIA, murdering and dismembering the journalist Jamal Khashoggi.
These attacks on individuals, however, paled in comparison to the Kingdom’s military misjudgments. The war in Yemen, pushed by Mohammed bin Salman when he became Minister of Defense in 2015, was expected to be a quick triumph. Instead it has become the worst humanitarian disaster on earth. American-made missiles and bombs have killed thousands of civilians due to some combination of Saudi carelessness, incompetence, and malice. The campaign has also been an embarrassment for Saudi Arabia’s paper tiger military, outfought by Yemen’s Houthi militia and trapped in an unwinnable war — a war backstopped by the support of both the Obama and Trump administrations.
These decisions ultimately damage the United States, rightly seen as Saudi Arabia’s unblinking protector. Though Congress took belated steps to end the Saudi campaign in Yemen, most Americans could and did ignore Saudi Arabia’s recent actions in its own neighborhood. But as job losses mount, ordinary Americans will finally face the consequences of our toxic relationship with the Saudi monarchy.
In his Farewell Address of 1796, George Washington warned his countrymen against either “a habitual hatred or a habitual fondness” for any other nation. The coronavirus pandemic is leading many Americans to reevaluate our relationship with China. A cold, hard look at our Saudi partners should follow. Despite 75 years of partnership, this month’s attack on America’s oil industry should make it clear that Saudi Arabia is an increasingly unreliable and incompetent partner. The U.S. should proceed accordingly.
Gil Barndollar is a fellow at Defense Priorities and at the Catholic University of America’s Center for the Study of Statesmanship. Sam Long is an investor with experience in the oilfield as well as the broader small business economy. From 2009-2015 he served as an infantry officer in the U.S. Marine Corps. The views expressed are the authors' own.