OPEC has been trying to negotiate production cuts in order to prop up oil prices. Mexico resisted making any cuts. AMLO then declared that he had asked the United States to make part of the requested cuts on Mexico’s behalf. Trump, in a press conference, announced that the U.S. would make the cuts but request “reimbursement at a later date.”
What does it all mean?
- AMLO really loses his senses when oil is concerned. Right now, Mexico loses money on every barrel it points. Inasmuch as it is geologically possible for Pemex to cut production, Pemex should cut production. But AMLO refuses to accept that. It may be because he believes that he’s linked his reputation to increasing oil production and that failing to do so will hurt him politically. But he believes that then he is a terrible politician … and we have evidence that he is not a terrible politician. Which leaves us with the conclusion that he really like to dig hydrocarbons out of the ground and set them on fire because he likes to dig hydrocarbons out of the ground and set them on fire.
- President Trump does not have the authority to cut U.S. oil production. Individual state governments do have that authority—the Texas Railroad Commission is famous for controlling production in that state—but there is no sign that the President intends to call in state regulators and ask them to order private producers to shut wells.
- S. production is crashing anyway. Unconventional oil wells in the United States decline hyperbolically. That means that companies need to keep drilling just to keep up production. When prices are low, they stop drilling, and production falls. The EIA projects that U.S. production will fall by at least 500,000 barrels per day this calendar year and another 700,000 barrels in 2021. This isn’t a hard projection to make, considering as production is already down 600,000 bpd from last week.
- AMLO is putting on a show for OPEC. He’s trying to get OPEC to pretend that a U.S. production fall that would have happened anyway is actually a deliberate action on the part of the United States to help out Mexico. OPEC knows this is bullshit, but will likely give AMLO the fig leaf he’s looking for.
- Trump’s demand for compensation is meaningless, but not for the reasons you think. When I was a kid back in New York, we’d talk about the “favor bank.” (Often called the “Irish favor bank” for reasons I don’t understand at all.) You’d pay into the favor bank, you’d make withdrawals from the favor bank. Donald Trump has never played by the favor bank. If he wants something from you, he will do whatever he can to get it from you. If Donald Trump wants something from Mexico in the future then he will ask for it regardless of whatever “favors” he granted now. And he will threaten Mexico in order to get it. In that sense, AMLO’s request was costless.
- OPEC wanted Mexico on board because reasons. This is the only part of the story that I don’t understand. Why couldn’t OPEC have just ignored Mexico’s posturing.
In other words, this is much ado about nothing.
In fact, if this is right, then it really was about nothing for nothing ...
Saudi Arabia plans to issue a statement blaming Mexico for not agreeing to cut its production (by the allocated amount of 400k) #OOTT
— Amena Bakr (@Amena__Bakr) April 10, 2020
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