Sharpening conflict over world oil market

World petroleum prices have crashed. On March 30, 2020, the spot price of Brent Crude oil was less than 20 US $ per barrel. This is the lowest price of crude oil in the past 19 years, since 1991. In February 2020, it was priced at 56 US $ per barrel.

This follows the breakdown of an arrangement between two major oil exporting countries, Saudi Arabia and Russia, at the meeting of oil exporting countries in the first week of March 2020. But a third country is at the center of the tensions that have now spilled out into the open — the United States.

Saudi Arabia leads the world’s most powerful cartel of oil exporting countries, called the Organization of Oil Exporting Countries or OPEC. Other members include the UAE, Iran, Iraq, Kuwait, Libya, Nigeria, Venezuela, Algeria, Angola, Congo, Equatorial Guinea and Gabon. Russia, the world’s second-largest oil producer after Saudi Arabia formed a parallel group of oil exporting countries in 2016. These include Azerbaijan, Bahrain, Bolivia, Kazakhstan and Mexico.

Since December 2016, Saudi Arabia and Russia have coordinated the volumes of crude their groups produce, in order to keep global oil prices high enough that it benefits both. But in the meantime, the US has increasingly been flooding the world with its shale oil at lower prices, increasing its market share from less than 11 percent in November 2016 to 15 percent in November 2019. By contrast, Russia and Saudi Arabia’s share has remained at around 12-13 % in this period. (See graph: Dwindling share of the world oil market)

Graph 1

 

As the world’s biggest economic and military power, the US hasn’t relied only on so-called “free market” mechanisms. Through a web of economic sanctions against other major oil producers such as Iran and Venezuela, and pressure on crude importers like India and Japan, it has coerced nations into buying its oil. India’s oil payments to the U.S. are expected to jump to $10 billion this year, up from $3.6 billion in 2018.

It’s that context that laid the ground for the breakdown in the Saudi-Russian arrangement at a March meeting between the oil ministers of OPEC countries and Russia. Arguing that the demand for oil had come down as a result of the impact of the coronavirus crisis on China and the world economy, Saudi Arabia proposed a fresh set of deep cuts in oil production. It proposed that the OPEC would cut production by 1 million barrels a day (mbpd) from April 1, 2020, if the Russia-led group would slash production by 500,000 barrels per day. Russia rejected this proposal.

Following this, Saudi Arabia and Russia have launched an oil war, each raising oil production to capture the biggest share of the market. Saudi Arabia has announced plans to increase the production of oil by 2 mbpd from April, up from its March production of about 10 mbpd. Russia too has announced that it will increase production of oil. This is flooding the world market with oil, even as demand is drastically reducing because of the deepening economic slowdown that’s been accelerated by the coronavirus pandemic. The price of crude oil in the world market is expected to crash further in the coming months.

Fight over market share

Graph

The two groups of oil exporting countries led by Saudi Arabia and Russia have worked together to determine their supply to the market since 2017. In January 2017, they cut supply by 1.6 mbpd. In April 2018, they increased production. In January 2019, they cut supply by 1.2 mbpd. In January 2020, they cut supply by a further 2.1 mbpd. (See graph OPEC oil production and supply adjustments) Now, when the overall market has shrunk, these two leading oil exporting countries are engaged in a bruising price war to grab each other’s market share.

Russia has made clear its refusal to accept further cuts in production is a direct consequence of concerns that the US will simply sweep in to take that vacated market, as it has been doing since the discovery of shale oil a decade ago. In December 2015, then US President Barack Obama lifted a 40-year-old ban on crude oil export. In 2018, US shale oil production surpassed both Saudi Arabia and Russia.

Total US oil production rose from 5.7 mbpd in 2011 to 17.94 mbpd in 2018. The US is on target to become a net exporter of oil by the end of 2020.

The falling price of oil is expected to hurt the economies of Russia and Saudi Arabia. Russia’s budgeting is based on assuming a petroleum price of at least $42.50 per barrel. Saudi Arabia’s budgeting is based on assuming a petroleum price of at least $85 per barrel. At the same time, the falling price of oil is expected to force many of the smaller shale oil producing companies of the US to file for bankruptcy. The breakeven point for US shale oil is estimated to be $46 a barrel. The market share of the US in the global oil market, is expected to drastically reduce.

What is going on is a fierce fight amongst the biggest oil exporting countries to hold onto and increase their share of a global oil market which is shrinking in the conditions of the economic crisis.

 

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Apr 1-15 2020    World/Geopolitics    Economy     2020   

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