THE WALL STREET JOURNAL. Wednesday, March 11, 2020 |A
T
he oil-exporting alliance
between Saudi Arabia and
Russia collapsed on Fri-
day after almost four
years. The OPEC+ deal,
which the two countries brokered in
2016 after a debilitating 2014 price
collapse, is over, called off by the
Russians. Result: a free-for-all in
the world oil market, lower prices
and a battle for market share. The
No. 1 target in Russia’s crosshairs is
the U.S. shale industry.
John D. Rockefeller in the 19th
century described this kind of bat-
tle as “good sweating”—low prices
that put pressure on competitors.
The term takes on added meaning
now. The sweating in the market,
as in a growing number of sick
people, is a symptom of the new
coronavirus.
The outlook for oil looked much
better at the beginning of the year.
The “phase one” U.S.-China trade
deal appeared poised to boost the
world economy and increase de-
mand for petroleum. But the coro-
navirus epidemic and subsequent
shutdowns in China caused demand
to plummet in the world’s largest
importer of oil. Elsewhere demand
has tapered.
The result has been an unprece-
dented shock to the global oil mar-
ket. IHS Markit, where I work, esti-
mates that in the first quarter of
2020 global demand cratered by 3.
million barrels a day compared with
the same period in 2019. This would
be the largest drop ever, bigger
even than during the 2008 financial
Russia’s push for lower
prices gets a boost from a
demand shock. Can U.S.
shale producers survive?
Covid-19 Makes Oil Markets Sweat
crisis. Before Russia’s decision on
Friday, oil prices had already fallen
almost 30% since the year began.
The Saudis, who cut oil output in
2019, were pushing the idea of fur-
ther cuts out to the end of the year
by the Organization of the Petro-
leum Exporting Countries and its
non-OPEC allies as a way to stem
the price decline caused by the vi-
rus. But on Friday Russian Energy
Minister Alexander Novak delivered
a clear message: Russia is not on
board. Prices fell another 10%. On
Monday Saudi Aramco announced it
is slashing prices and boosting pro-
duction, and the plummet followed.
The Russians provided a clue to
their thinking on the virus by can-
celing the St. Petersburg Interna-
tional Economic Forum, the global
conclave that is Vladimir Putin’s an-
swer to Davos. It was scheduled for
June. The Russians see a global
pandemic that will continue to
bring oil prices down. A production
cut would be a Band-Aid that would
work only for a few weeks.
Consider also the relationship
between Russia and Saudi Arabia.
Mr. Putin’s visit to Saudi Arabia last
fall, during which he presented KingSalman with a Siberian falcon,
showed a growing relationship that
extended beyond oil. But relations
have since cooled, especially re-
garding oil. Moscow and Riyadh
have different perspectives. Russia’s
budget relies on $42 a barrel. Saudi
Arabia needs a considerably higher
price, particularly to fund its ambi-
tious Vision 2030 reform program.
The two countries have a funda-
mentally different view of the
growth in U.S. shale oil production.
Saudi Arabia has largely accommo-
dated itself to the idea that Ameri-
can shale is here to stay. Not Rus-
sia. Moscow has asked why it
should restrain its oil output and
surrender market share to its stra-
tegic competitor, the U.S. Since the
2016 OPEC+ deal, U.S. oil output has
grown by 4.8 million barrels a day—
almost a 60% increase.
Russia may be an energy super-
power, but it has been overtaken by
America, which produces more oil
and more gas—and considerably
more oil than Saudi Arabia. The U.S.
is also on the way to becoming one
of the world’s major exporters of
natural gas, in its liquefied form.
That provided another reason forMoscow to promote the “good
sweating” to stem U.S. production.
The market disarray is also Mos-
cow’s payback for sanctions the U.S.
imposed in December on the $11 bil-
lion Nord Stream 2 pipeline, which
is meant to carry Russian natural
gas under the Baltic Sea to Ger-
many. The sanctions forced the
barge laying the undersea pipe to
stop work abruptly—a week or so
short of completion.
One can surmise that Moscow in-
terpreted the sanctions not as pun-
ishment for invading Ukraine or in-
terfering in the 2016 U.S.
presidential election, but as a way
to favor U.S. natural gas exports to
Europe. Support for that theory
came from President Trump, who in
a tweet last summer announced
that Europe would be buying “vast
amounts of LNG” from the U.S. He
signed the sanctions bill a few
months later. Moscow didn’t think
this was a coincidence.
Even if there is no deal for now,
OPEC+ could be reactivated later in
the year—or sooner if the pain be-
comes unbearable. As low-cost pro-
ducers, both Saudi Arabia and Rus-
sia are well-positioned to duke it
out for market share. Not so for
other producers. In the past few
years, U.S. shale companies have
become more efficient and brought
down costs. And growth in U.S. out-
put was already on track to slow.
Even so, shale is not low-cost and
this good sweating will put pressure
on U.S. producers. Companies will
reduce or stop drilling. Some will
go bankrupt or merge, and U.S. pro-
duction will flatten out or, if prices
stay down, decline.
For how long? That will depend
on how long the virus continues to
attack the health of the world
economy.Mr. Yergin is vice chairman of
IHS Markit and author of “The New
Map: Energy, Climate and the Clash
of Nations,” forthcoming this year.By Daniel Yergin
GIUSEPPE CACACE/AFP/GETTY IMAGES
At the Dubai Stock Exchange March 8.OPINION
White House
Principles
For Reducing
Drug Costs
By Joe GroganA
divided Congress in a presi-
dential election year may seem
an unlikely setting for the first
major drug-pricing reform in de-
cades, but over the past year com-
mon goals and designs have emerged
to set up a rare opportunity. Presi-
dent Trump in his State of the Union
address called on both parties to “get
something on drug pricing done,
done quickly, and done properly.”
During times when our country faces
public health challenges, America’s
strength in pharmaceutical innova-
tion is recognized as an asset we
must employ. The administration’s
goal is to help patients, including se-
niors, afford the drugs they need, not
destroy this vital industry. The White
House urges Congress to adhere to
the following five principles:- Cap out-of-pocket expenses in
Medicare Part D. Seniors with the
most expensive conditions often bear
the brunt of high drug prices, despite
a program ostensibly designed to
mitigate catastrophic costs. The un-
limited cost-sharing of the Medicare
Part D benefit leaves more than one
million beneficiaries on the hook for
potentially thousands in additional
spending annually. - Provide an option to cap monthly
pharmacy costs. Seniors who expect
to reach the cap should be able to
spread these costs out throughout
the year. - Offer protection against the cost
cliff created by ObamaCare. The re-
cent expiration of a temporary
ObamaCare gimmick has increased
the amount some seniors must pay
out-of-pocket by up to $1,250 a year.
They need relief until the new out-of-
pocket cap can be implemented. - Give insurance companies an in-
centive to negotiate better prices for
costly drugs. A flaw in Part D has cre-
ated incentives for drugmakers to
collude with insurers to pass costs to
the government. Bipartisan drug
pricing reform should remedy this by
increasing insurers’ share of the bur-
den after seniors hit the new out-of-
pocket maximum. - Limit drugmakers’ price in-
creases. The price Medicare Part B
pays for one common rheumatoid-ar-
thritis drug increased on average
more than 15% each year from
2014-18. That increased spending in
Medicare on this one drug alone by
more than $340 million a year during
that span. This price gouging can be
limited without jeopardizing future
innovation.
These White House principles for
drug-pricing legislation are achiev-
able. They have been endorsed by
members of Congress from both
sides of the aisle. Elements of each
principle are reflected in the biparti-
san policies in both Senate Finance
Committee Chairman Chuck Grassley
and Ranking Member Ron Wyden’s
drug package and a bill introduced by
Rep. Greg Walden (R., Ore.), ranking
member of the House Energy and
Commerce Committee. Additionally,
though the White House opposes the
Democrat-backed H.R. 3 (styled the
Elijah E. Cummings Lower Drug Costs
Now Act), elements of the bill, such
as the Part D redesign, are consistent
with these principles.
Some lawmakers may try to hijack
this momentum for partisan pur-
poses and demand provisions they
know the other side won’t accept. We
have already seen proposals that
would effectively set prices under the
guise of “negotiation.” There will
likely be efforts to add unrelated new
benefits to Medicare when the pro-
gram can’t meet its current promises.
Congress must ignore these partisan
distractions.
President Trump has made lower-
ing prescription-drug costs a priority
and is willing to invest political capi-
tal to work with both parties. House
Democrats have long clamored for
drug-pricing reform and passed a
sweeping bill last year, though it in-
cludes several unworkable provisions
and lacks true bipartisan support.
Senate Majority Leader Mitch McCon-
nell has committed to work toward a
drug pricing-package by May 22,
when health-care provisions in last
year’s appropriations deal expire.
Congress should capitalize on
this opportunity and work with the
administration to reject special in-
terests, reject partisan posturing,
and provide relief to the American
people.
Mr. Grogan is director of the White
House Domestic Policy Council.In our partisan times, an
opportunity for lawmakers
to work across the aisle
and get something done.PUBLISHED SINCE 1889 BY DOW JONES & COMPANY
Rupert Murdoch
Executive Chairman, News Corp
Matt Murray
Editor in ChiefRobert Thomson
Chief Executive Officer, News Corp
William Lewis
Chief Executive Officer and PublisherEDITORIAL AND CORPORATE HEADQUARTERS:
1211 Avenue of the Americas, New York, N.Y., 10036
Telephone 1-800-DOWJONES
DOW JONES MANAGEMENT:
Ramin Beheshti, Chief Technology Officer;
Natalie Cerny, Chief Communications Officer;
Kamilah Mitchell-Thomas, Chief People Officer;
Edward Roussel, Chief Innovation Officer;
Christina Van Tassell, Chief Financial Officer
OPERATING EXECUTIVES:
Kenneth Breen, Commercial;
Jason P. Conti, General Counsel;
Tracy Corrigan, Chief Strategy Officer;
Frank Filippo, Print Products & Services;
Kristin Heitmann, Chief Commercial Officer;
Nancy McNeill, Corporate Sales;
Thomas San Filippo, Customer Service;
Josh Stinchcomb, Advertising Sales;
Suzi Watford, Chief Marketing Officer;
Jonathan Wright, International
Barron’s Group: Almar Latour, Publisher
Professional Information Business:
Christopher Lloyd, Head;
Ingrid Verschuren, Deputy HeadNeal Lipschutz Karen Miller Pensiero
Deputy Editor in Chief Managing Editor
Jason Anders, Chief News Editor; Louise Story, Chief
News Strategist, Product & Technology Officer
Thorold Barker, Europe; Elena Cherney, News
Features & Special Projects; Andrew Dowell,
Asia; Anthony Galloway, Video & Audio;
Alex Martin, Print & Writing; Michael W. Miller,
Features & Weekend; Emma Moody, Standards;
Shazna Nessa, Visuals; Matthew Rose, Enterprise;
Michael Siconolfi, Investigations; Nikki Waller, Live
Journalism; Stephen Wisnefski, Professional News
Gerard Baker, Editor at Large
Paul A. Gigot, Editor of the Editorial Page;
Daniel Henninger, Deputy Editor, Editorial Page
WALL STREET JOURNAL MANAGEMENT:
Joseph B. Vincent, Operations;
Larry L. Hoffman, Production
Why a Pandemic Is Always Political
People who follow
politics for a living
are voicing shock—
shock!—that the cor-
onavirus outbreak
has been politicized.
“Is Even the Corona-
virus Partisan?”
asked a recent Five-
ThirtyEight podcast.
Jeez Louise, folks, of
course it is. And
here’s an argument for why it ought
to be.
Making political hay of health
scares is a commonplace activity
that’s also unfailingly bipartisan.
Democrats complained that Presi-
dent George W. Bush was too slow in
responding to the West Nile virus
and SARS outbreaks that occurred in
his first term, and talking points to
that effect became part of John
Kerry’s presidential campaign in
2004.
Republicans returned the favor in
the runup to the 2014 midterm elec-
tions, when President Obama was
trying to keep West Africa’s Ebola
epidemic from crossing the Atlantic.
Mr. Obama tapped Ron Klain, a for-
mer vice-presidential aide, to coordi-
nate the response, and Republicans
reacted by calling Mr. Klain a politi-
cal hack with no medical back-
ground. Which is precisely how Dem-
ocrats responded last week to
President Trump appointing Vice
President Mike Pence to be the point
man on coronavirus.
Mr. Trump understands by now
that he will be knocked by his politi-
cal opponents and their friends in
the media regardless of how he pro-
ceeds. If he overreacts, they’ll say
he’s creating a panic. If he underre-
acts, they’ll say he’s lackadaisical.
And since this president is not some-
one who lets criticism go, count on
him doing his level best to punch
back at every opportunity.
The best thing Mr. Trump could
do for the country right now is find
a way to calm fears without being
overly dismissive of the threat posed
by a virus that medical doctors and
human immune systems have never
encountered before. And he needs to
be wary of overpromising how soon
it will all be under control. Schools
are closing, conferences are being
canceled, spring-break travel is on
hold, and testing for the virus is onlynow ramping up. More economic dis-
ruption is coming, and the adminis-
tration’s focus should be on prepar-
ing people to absorb the shocks.
Hope that Mr. Trump’s efforts to
protect public health will be based
on the vast amounts of information
and expertise at a president’s dis-
posal, and not on what he’s watching
on CNN.
The only thing we know for sure
is that the political pot shots will
continue, and why shouldn’t they?
Politicians exploit our apprehensions
for a living. It’s a presidential elec-
tion year, heath care has been a ma-
jor campaign theme, and voters de-
serve to know what the Democratic
candidates would do differently. Joe
Biden hasn’t been very specific about
how he would address an infectious-
disease pandemic, but in a newspa-
per op-ed, he did describe the presi-
dent as “the worst possible person to
lead our country through a global
health challenge.”
Bernie Sanders said on Twitter
that he would make any coronavirus
vaccine available for free. Someone
might ask the Vermont senator how
price controls would affect the devel-
opment of new medicines going for-
ward. Nor is cost a real factor in why
people shy away from other available
vaccines, as he suggested. Millions of
Americans neglect to get a flu shot
each year out of fear, ignorance or amisguided sense of invulnerability,
but not because they can’t afford it.
It’s clear that both Democratic
candidates want government to play
a much larger role in U.S. medical
care going forward, and Mr. Trump
might press them to explain how
public health would be better served
under such a system during future
pandemics, which are inevitable. If
coronavirus is going to be politi-
cized, this is the debate we should be
having. But don’t hold your breath.
For now, both sides seem content
with silly posturing. On Sunday,
Democratic Rep. Jackie Speier of
California said that Mr. Trump’s re-
fusal to cancel campaign rallies
“suggests that he is willing to place
even his most ardent supporters at
risk.” In a joint statement, Senate
Minority Leader Chuck Schumer and
House Speaker Nancy Pelosi saidthey want to work with the presi-
dent but that he “continues to manu-
facture needless chaos” and “is ham-
pering the government’s response”
to the outbreak.
And last week, GOP Rep. Matt
Gaetz appeared to mock people who
are concerned about the spread of
coronavirus by tweeting a photo of
himself wearing a huge gas mask on
the House floor. A few days later a
resident in his Florida district died
after contracting the virus, and the
congressman himself is now in quar-
antine after coming in contact with
someone who has tested positive for
the disease.
Mr. Trump has an opportunity
to be the adult in the room, and he
would pleasantly surprise a whole
bunch of voters in swing states
and help himself in November by
seizing it.The posturing on both
sides distracts from what
could be a productive
debate about public health.UPWARD
MOBILITY
By Jason L.
Riley
The Best Stimulus Is
Coronavirus Testing Kits
W
hen people asked me a few
months ago about the proba-
bility of a recession in 2020, I
said 10% to 20%. A week or two ago, I
was up to 40% to 50%. Now I’m at 90%
and rising. The biggest worry is that
consumer spending will fall off a cliff
as Covid-19 feeds fear of travel, restau-
rants, theaters, sporting and concert
events, barbershops and beauty salons
and the like—not to mention going to
the shopping mall.
Consumer spending is roughly 70%
of gross domestic product. A 5% de-
cline would amount to 3.5% of the
economy, more than enough to trigger
a recession. I’m not forecasting a 5%
drop, but no one has any basis for
guessing the magnitude because no
one knows how widely the virus will
spread or how much fear it will engen-
der. The best, though imperfect, rem-
edy is a massive expansion of testing.
It’s a shame and a disgrace how
slow the U.S. has been with testing.
The goal should be not the million or
five million tests Vice President Mike
Pence has promised, but perhaps 100
million or more. Covid-19 symptoms
don’t show up immediately and may be
hard to distinguish from the flu. So
none of us know if we’ve been exposed,
and many will need multiple tests.
If most Americans who wanted a
test could get one, and if people who
tested positive stayed home and
sought medical attention, fear of go-
ing out wouldn’t disappear, but it
would dissipate. Think of it as a su-
per-effective form of fiscal stimulus.
Test kits are ridiculously cheap com-
pared with the GDP and job losses
they might forestall.
The president keeps chastising the
Federal Reserve for not lowering in-
terest rates, but rate cuts wouldn’t
help much. No one knows how long
the pandemic will last, but it’ll likelybe months or quarters, not years. In-
terest-rate cuts have little economic
impact until a year or two passes. It’s
too late for monetary policy.
It’s also too little. Rate cuts stimu-
late the economy by encouraging
people and businesses to spend more
on interest-sensitive items like
houses, cars and business equipment.
People huddling at home and busi-
nesses watching their sales drop
aren’t prime candidates to spendmore because borrowing gets
cheaper. Monetary policy is thus less
powerful than usual. To fight past re-
cessions, the Fed has typically cut
rates 3 to 7 percentage points. Rates
are too low to do that now.
More fundamentally, major nega-
tives for the economy come on the
supply side. Global supply chains have
already been disrupted. Companies
are beginning to instruct their em-
ployees to work from home. But that’s
not an option for everyone, and it will
reduce productivity for many. The Fed
is powerless to do anything about
this, other than providing liquidity
where needed and allowing banks to
forbear on loans in arrears.
So, Mr. Trump, please stop badger-
ing the Fed to cut rates and start
badgering any firm or agency that
can do so to get more testing kits
into the field.Mr. Blinder is a professor of eco-
nomics and public affairs at Prince-
ton University and a former vice
chairman of the Federal Reserve.By Alan S. BlinderUntil we know the extent
of the epidemic, people
will avoid going out and
spending money.