Hello in 40 years: will the US succeed in crashing oil prices
US President Donald Trump on January 23 called on OPEC countries, primarily Saudi Arabia, to lower oil prices. According to him, it is strange that they did not do so even before the elections in the United States. Trump's plan is to induce Russia to suspend the INF and negotiate the fate of Ukraine through lower oil prices, while maintaining leverage over Moscow. The US president's idea may have been inspired by the theory of price cuts in the 1980s that weakened the Soviet Union - but it has nothing to do with reality. Details - in the material "Izvestia".
Trump, speaking in Davos, addressed OPEC leaders directly. In addition to the "peacekeeping" sense of his proposal has and anti-inflationary: after the fall in oil prices, the world's central banks may begin to reduce rates. After all, if black gold becomes cheaper, the threat of inflation will become lower and it will be possible to "loosen the reins" of monetary policy. The effect on the markets turned out to be moderate. Oil prices fell by 1-2%, but only just.
Reagan-Fahd conspiracy?
In his statements, Trump may have been guided by the conspiracy theory that the decisive act of the Cold War in the 1980s was the actions of then US President Ronald Reagan, who convinced Saudi Arabia to radically increase production. This, in turn, caused oil prices to fall below $10 a barrel (at today's prices, about $29 a barrel). The price drop was an unpleasant development for the Soviet Union at the height of perestroika - petrodollars helped pay for vital imports (including high-tech imports). The USSR's trade balance and budget began to come apart at the seams, which, among other things (within the framework of the theory - first of all) led to its eventual collapse in 1991.
Former U.S. President Ronald Reagan, 1988
In Russia, this theory was popular in the 1990s and especially in the 2000s-2010s among people of all political persuasions, and was often accepted as fact. In the United States, it also had a number of supporters. Even Reagan's adopted son Michael was an adherent. Not long ago, the head of the Ukrainian president's office, Andriy Yermak, spoke of it, with the implication that Americans should do the same now to support Ukraine.
It was described in some detail in a book by political consultant Peter Schweitzer, Victory: The Reagan Administration's Secret Strategy That Accelerated the Fall of the Soviet Union. In particular, it pointed out that in 1981, CIA Director William Casey, during a visit to Riyadh, raised in the same conversation the topics of U.S.-Saudi security and increased Saudi oil production. This, according to Schweitzer, should prove a coordinated strategy thereafter.
"Not won, but lost."
However, this theory does not beat well with the facts. For one thing, prices were fine in 1981 - they were near an all-time high. And while they declined a bit over the next few years, it was a far cry from the severe recession of the second half of the decade. But the discipline in OPEC was not the best at that time. Most of the countries of the organization tried by all means to cheat the quota system by producing much more oil than the agreements required. In fact, OPEC was a dysfunctional organization during this period, and all attempts of its tacit leader, Saudi Arabia, to restore discipline failed.
If you look at the numbers, the Saudis have been reducing their production for several years. And not as they are doing now (by a couple or three million barrels from their record levels), but seriously. From 1981 to 1986, the country's oil production fell from more than 10 million barrels per day to less than 4 million. And only in 1986 there was a reversal - after a scandal during the next summit of representatives of the organization, when Iraq and Iran, which were at war, were warned for violating quotas. Riyadh got tired of pulling world prices solely by its own efforts and began to increase production. But there was no talk of a return to previous levels. Over the next two years, production rose to 5 million barrels per day, still half of what it was at the previous peak.
Based on Schweitzer's theory, one could assume that the Americans were delighted by Riyadh's actions or, on the contrary, angered by the Saudi leadership's lack of resolve. Both of these assumptions are wrong. In reality, Reagan sent George Bush, Sr. (his vice president at the time) on a mission to persuade Saudi Arabia to return things to the way they were. The reason? The damage that even such modest efforts by the Saudis had done to the U.S. oil industry. Indeed, from 1986 through the late 2000s, this sector of the U.S. economy was in decline. Bush bluntly told King Fahd that increased Saudi production posed a direct threat to U.S. national security.
The Soviet-American summit meeting in Geneva. General Secretary of the CPSU Central Committee Mikhail Gorbachev and U.S. President Ronald Reagan before their talk, 1985.
It should be added that Soviet-American relations began to improve rapidly after the meetings between Reagan and Mikhail Gorbachev, General Secretary of the CPSU Central Committee, in Geneva and Reykjavik. At the same time, Soviet oil production was at its peak: unlike U.S. oil production, it had been operating at a profit throughout the 1980s. Although the decline in prices dealt a significant blow to the Soviet economy, supplies remained at a plateau of 12 million barrels per day for the next few years, and it was not until 1990 that they began to collapse. And it was not due to the fall in oil prices (they were at a historic high against the background of the Iraq-Kuwait conflict), but rather to the general crisis of the Soviet economy.
Nobody needs extra oil
To summarize, we can say that although the USSR suffered from the fall in oil prices in the second half of the 1980s (but it is not serious to call it the main reason for the collapse of the Union - there were many other circumstances) and Saudi Arabia did raise production, otherwise the theory of coordinated efforts and "cunning plan" of Washington and Riyadh has no connection with reality. The Saudis raised production slightly and very reluctantly, the U.S. was not happy about it at all, rightly fearing the consequences for its own oil sector, and the decisive factors in lowering world prices were rather the development of energy conservation in the world's largest economies, as well as the lack of discipline among the remaining OPEC countries.
The current situation does not overlap much with the situation then, but there are still some similarities. As then, neither side, whether America or Saudi Arabia, has a strong enough incentive to lower prices. The Saudis have voluntarily limited their own production for several years and continue to do so now. The kingdom needs an oil price of $100 a barrel to balance its current ambitious budgets.
As for the US, for them, as 40 years ago, lower prices mean big problems for their shale industry. Most fields can be profitable at at least $55-60 per barrel. Which is what we are seeing - prices have not fallen below those marks since the pandemic. Plans for large-scale drilling and increased production in America will conflict with pressure on OPEC to lower prices. Based on this, we can state that Trump's ideas are only declarative and there are no prospects behind them.
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