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Last Updated on: 21st August 2020, 12:33 am
Global crises are watershed moments after which the preexisting world order can rearrange for better or worse.
China’s initial secrecy about the outbreak of Covid-19 has drawn the ire of the international community. Lost in the noise, however, is a power struggle between oil-producing nations, Saudia Arabia and Russia—a clash with disastrous downstream impacts for oil-importing states.
Since March 8, the world has been entangled in an oil price war initiated by Saudi Arabia, the de facto leader of the Organization of the Petroleum Exporting Countries (OPEC), and Russia, a member of OPEC+, a sub-coalition of other oil-producing states.
This came on the heels of an emergency OPEC summit on March 5 in which the cartel decided to cut production levels by 3.6 million barrels per day (vis-à-vis 2016 benchmarks) to keep global supply in lockstep with falling Chinese demand. When OPEC urged Russia and the rest of OPEC+ to fall in line, they refused to play ball.
Instead, Russia announced that it would increase production in an effort to regain market share from international suppliers—in particular, US shale oil producers who cannot compete when oil prices fall below $50 a barrel. In retaliation, Saudi Arabia announced it would increase production by 2.6 million barrels per day and would offer steep discounts to the US and customers in Europe and Asia.
On April 7, Brent crude oil steadied at about $32 a barrel, roughly half what it cost in January. Not coincidently, the price of gold rose dramatically at the same time.
The Kremlin appears determined to leverage an unprecedented public health crisis to advance its own interests and create an every-state-for-itself international order. With economic conditions already so dire, ruthless self-interest by the world’s oil suppliers comes at the expense of human welfare worldwide.
The world is already suffering from joblessness as a consequence of social distancing and shortages due to disrupted supply chains. As if that weren’t enough, self-interested oil producers have made living conditions worse in all countries dependent on energy exports.
These include some of the world’s most vulnerable states, such as Venezuela, where oil represents 95% of exports and over 28 million people live in poverty.
Suppressed oil prices only bring about greater suffering for those who live in countries dependent on petroleum revenues or are employed in the oil and gas sector. To Intentionally crash the price of oil in the midst of a global humanitarian crisis is to give in to the brutish, amoral side of the international system in which every participant vies to make the other worse-off.
On Monday, any immediate hope for an interim deal was squashed when a virtual meeting between representatives of OPEC, Russia, and other oil-producing nations was abruptly postponed. Before a deal is struck, Saudi and Russian officials demand that the U.S. play its part in cutting production as well.
The White House insists on keeping its hands off private energy markets. However, the U.S. Department of Energy has stated that American output is already falling. Texas-based Exxon Mobil, for instance, has slashed spending across shale assets by $10 billion and shale giant Devon Energy has announced a 30% spending cut for 2020.
In February, the White House announced a new round of sanctions against a subsidiary of Russia’s state-controlled oil producer, Rosneft. Since December, sanctions against Russia’s Nord Stream 2 natural gas pipeline have incentivized European markets to favor U.S. shale gas.
If Moscow’s plan is to coerce the U.S. into lifting energy sanctions, it would seem that Washington isn’t willing to cooperate. Republican lawmakers have introduced legislation to remove US troops from Saudi Arabia, while the White House has threatened to impose more extensive tariffs on Russian crude.
As oil prices hit 20-year lows, the egos of the world’s largest energy players are at record highs. Russia’s refusal to play along with OPEC’s demands has caused the four-year alliance between OPEC and the OPEC+ coalition to effectively dissolve.
The pursuit of self-interest by the world’s heavyweight energy players has negative consequences around the globe. Although not everyone has a seat at the table, everyone has skin in the game—especially oil-rich nations such as Brazil, Canada, and Norway.
Now is not the time for realpolitik. At a time when cooperation between nations is needed most, world leaders appear intent on self-interested opportunism and shedding international alliances. The destabilization of a commodity that the world depends on for funding essential services and relief programs proves that the international system truly abides by no higher moral or ideological motives.
When the world is on its knees, the most powerful states would rather drown the market in cheap oil than seek price stability, compromise, and mutual benefit. These were the original aspirations of OPEC. Now it’s uncertain whether the organization will live to see its 60th birthday later this year.
If today’s crisis is a watershed moment, we may well see a more brutish, coercive, and poorer world downstream unless oil producers seek compromise for the good of all. Until then, instability and market volatility will run rampant on the oil and energy sectors, and add systemic risk to an already vulnerable global economy. To hedge against risk, investing in IRA-approved gold or adding other safe-haven assets untethered to the stock market or energy index can help protect your wealth in an uncertain geopolitical environment.