By Maddy Burt
A combination of COVID-19 and the Russia – Saudi Arabia price war has seen the oil price collapse to $23 a barrel, an 18-year low. While capacity limits for oil storage in countries could be reached in months, Whiting Petroleum, an American shale firm, is the first significant casualty from the price war-cross-pandemic, filling for bankruptcy.
Oil prices were already at falling quickly as a result of huge global uncertainty and fall in demand caused by the coronavirus. This was compounded with failed talks among ‘OPEC+’, OPEC members (led by Saudi Arabia) and ten non-member countries that came together in 2016.
Saudi Arabia proposed limiting production of oil to push the price back up, to which Russia responded negatively. This was possibly down to their concerns about American shale competitors benefiting from prices continuing to rise instead of being pushed out of production by the low prices.
In retaliation to lack of Russian cooperation, Saudi Arabia unleashed production to flood the market with oil and lower rather than raise oil prices. This will put pressure on the Russian economy, relying on much revenue from oil exports, but also the Saudi economy, and possibly most of all on smaller and less prepared nations.
Geopolitical fallouts of this kind pose a great likelihood of hurting those who only indirectly involved, sometimes more than causing serious harm to those directly involved. A certain oil price is needed for countries to balance their government budget. In Nigeria, that is estimated at around $125, and in Venezuela, $220.
This is against $42 in Russia, who already have years of saving from oil prices above this mark in preparation for a shock. Saudi Arabia holds $500 billion in foreign currency reserves. National budgets could be completely destroyed in countries more vulnerable than Russia and Saudi Arabia, countries already more susceptible to shocks from the coronavirus pandemic.
Tensions are bound to ease a little soon, with the biggest message from Saudi Arabia that they hold the steering wheel in the oil industry. It will let Russia know the measures it will take to control the industry from their backyard, rather than causing any serious damage.
Still, the price war offers a profound message amongst the crisis of the coronavirus.
For one, the oil industry is going nowhere anytime soon. Whiting Petroleum won’t be the first producer to collapse in the crisis, but nor will it set a precedent for all to come. Saudi Arabia are still confident in their ability to manipulate the market and survive the turmoil of low oil price enough to push the price down further themselves. Oil is still of uttermost importance globally – and the environment won’t benefit from global collapse of oil anytime soon.
For another, the negative sides of globalisation already exposed through prejudice and isolation in the coronavirus is only compounded with the price war. Countries are connected in trade and resources in a complex web like never before, suffering a chain reaction of shocks from national disturbances. In equal yet opposite measure, countries are massively hostile and distrusting to each other.
For many nations that rely less on oil exports than imports, lowered prices will be a relief, until they inevitably rise again. The absolute uncertainly around what the price will be in a week, let alone a few months, leaves little room to get comfortable.
It will be interesting to see how talks between OPEC and Russia, with America intervening, will play out. Trump might call for the unprecedented and limit shale production in America to protect producers. Either way, this price war is not a cause for celebration but a stark reminder that the oil industry is as volatile and unpredictable, yet cemented is our global economy, as ever.
Image: Trending Topics 2019 via Flickr