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A pandemic and a price war have together brought energy markets to a crisis
By Daniel Yergin / Foreign Affairs / April 2, 2020
Excerpts follow: Read the full article here — https://fam.ag/2R4S4Pr
The global oil market has never before in history collapsed as precipitously as it has right now. The oil and gas industry, which provides almost 60 percent of the world’s energy, is engulfed in a double crisis that would have been dismissed as unthinkable at the start of this year. A price war, with producing nations battling for market share, has become lodged in the larger crisis of the novel coronavirus pandemic and what will likely be the worst recession since World War II. The resulting collapse in demand will be bigger than any recorded since oil became a global commodity….
“As with so many other industries, the extreme distress in oil markets was caused by the coronavirus pandemic. But in the case of oil, that distress comes with a geopolitical twist.” – Daniel Yergin, vice chairman, IHS Markit writing in Foreign Affairs
….U.S. President Donald Trump himself has already stepped into the fray. Although he has long been an advocate of low oil prices—and quick to tweet against the Organization of the Petroleum Exporting Countries (OPEC) and efforts at global supply management in recent years—the current collapse has prompted a reversal. He recently called Russian President Vladimir Putin to talk about what can be done to stem what he would later call the “hurtful” decline. Trump then called Saudi Crown Prince Mohammed bin Salman and announced that a sizable coordinated reduction by the major oil producers is in the works. The Saudis have followed up by calling for a reconvening of OPEC, along with other key oil-producing nations, including Canada and Mexico….
….The last oil price collapse, which began in 2014 as a result of a surge in supply, finally ended in 2016 with the emergence of a new order in international oil—OPEC+. This was an agreement between 11 OPEC members and ten non-OPEC countries to jointly reduce production in order to stabilize a falling market….
….But the first phase of the coronavirus crisis, the outbreak in China in January and February, fractured the entente. China, the biggest growth market for world oil, was suddenly shut down. Instead of global demand increasing, as was expected, it fell by an unprecedented six million barrels per day in the first quarter of 2020.
At the beginning of March, in and around OPEC and OPEC+ meetings in Vienna, Saudi Arabia and Russia began discussions about how to respond. It quickly became clear that they had very different perspectives. The Russian budget was based on what was seen as the relatively low price of about $42 a barrel. Meanwhile, Saudi Arabia, according to International Monetary Fund estimates, needed higher prices of around $80 a barrel to balance its budget. Accordingly, Saudi Arabia wanted deep cuts in output in order to try to put a floor under the price; Russia, professing uncertainty but assuming the impact of the coronavirus was likely to be much greater and would affect demand worldwide, argued instead to keep the existing agreement until June and then see where things stood.
Saudi Arabia insisted on the cuts. Russia emphatically said no. And so OPEC+ split apart….
….Because of the nature of their oil fields, Russia and Saudi Arabia are able to produce oil at costs much lower than most other countries. In those other, higher-cost countries, when the price that a barrel will fetch is lower than the costs of operating the well, a company can’t afford to continue pumping without losing money on every barrel. At that point, a company will close the well temporarily. Among the hardest hit is U.S. shale oil. As a consequence, the United States will likely have to give up share in the global market, to others’ gain. And as Igor Sechin, the CEO of Rosneft (which produces 40 percent of Russia’s oil) and a critic of the 2016 OPEC+ deal, has put it, “If you give up market share, you will never get it back.” (For some in Moscow, that is welcome, for they see the growth of U.S. shale as having given the United States a free hand to impose sanctions on the Russian energy sector—such as those last December that halted the Nord Stream 2 pipeline from Russia to Germany just before its completion.)….
“Is there some way to stabilize the global market? Ending the battle for market share would reduce the surplus flowing into the market, take some pressure off storage, and have a positive impact on market psychology, which is one of the factors that shapes prices. It would address only part of the problem of oversupply, but even that would be significant. How to achieve such stabilization is another matter.” – Daniel Yergin, vice chairman, IHS Markit writing in Foreign Affairs
….At this point, both the Saudis and the Russians seem dug in. They could always conclude that circumstances have changed and decide to resolve their differences; Saudi Arabia even has a unique platform for facilitating such a resolution, since it is chair of this year’s G-20, the forum for the world’s major economies to address and remedy international economic problems. During the 2008–9 crisis, the G-20 functioned as a sort of board of directors of the world economy. But that was a more collaborative era….
