The global oil market has never in history collapsed as precipitously as it has right now. 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. Oil prices are already down two-thirds since the beginning of and still falling. The decline in global consumption in April alone will be seven times bigger than the biggest quarterly decline following the —9 financial crisis.
|Genre:||Health and Food|
|Published (Last):||4 August 2005|
|PDF File Size:||16.71 Mb|
|ePub File Size:||9.16 Mb|
|Price:||Free* [*Free Regsitration Required]|
The global oil market has never in history collapsed as precipitously as it has right now. 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. Oil prices are already down two-thirds since the beginning of and still falling. The decline in global consumption in April alone will be seven times bigger than the biggest quarterly decline following the —9 financial crisis.
In areas that lack access to storage and markets, the price of a barrel of oil could fall to zero. This crash will create turmoil for oil-exporting countries and add to the turbulence of financial markets. It will also add another layer of complexity to an already fraught geopolitical situation—including by pulling the United States into contentious international wrangling over what can be done to ameliorate the crash.
In February of this year, U. 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.
The Saudis have followed up by calling for a reconvening of OPEC, along with other key oil-producing nations, including Canada and Mexico. And the larger the universe of players, the more difficult it will be to implement an agreement. The nature and sheer scale of the current collapse and the geopolitical wrangling it has prompted present unique challenges for the United States and its energy sector—challenges that will have significant consequences for the U.
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. For Saudi Arabia, it was a way to hedge its relationship with the United States and gain some leverage in its standoff with Iran.
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 It quickly became clear that they had very different perspectives.
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.
It began pumping as much as it could, aiming to add 2. The additional production was supposed to help make up for the decline in price.
Russia responded by announcing that it would also produce all it could, though its capacity to increase is much lower, closer to , barrels per day. The battle for market share was on. But while the price was already falling, the coronavirus outbreak was moving into its second and more devastating phase—the global pandemic. The resulting shutdown of much of the global economy has generated a collapse in demand on a scale the world has never seen before. In April, the decline could be 20 million barrels per day or more—about 20 percent of total demand.
On a country-by-country basis, IHS Markit calculates that virtually every available gallon of storage space in the world will be full by late April or early May.
When that happens, two things will result: prices will plummet and producers will shut down wells because they cannot dispose of the oil. 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.
At that point, a company will close the well temporarily. Among the hardest hit is U. They are slashing their budgets and either greatly reducing or stopping drilling altogether. With shale, drilling new wells is required to maintain production. If that comes to pass, the United States will still be a large producer, but well behind Russia and Saudi Arabia, and imports will rise. The economic costs will be high, given the importance of the shale revolution to the overall U.
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. During the —9 crisis, the G functioned as a sort of board of directors of the world economy. But that was a more collaborative era.
There are limits to what the United States can do. Members of Congress who are normally supportive of arms deals with Riyadh now want to tie the overall U. Within the United States itself, the government has only a limited set of tools. Unlike Riyadh and Moscow, Washington cannot tell companies how much oil to produce.
The power to regulate output of oil lies with the states, most notably with the Railroad Commission of Texas, which despite its name regulates oil production in that state, which accounts for 40 percent of total U. Outside of the United States, it would be read as a signal that other countries should also implement production cuts. With much of the global economy at a standstill, the oil crisis is going to get worse in the weeks ahead, and the damage will be felt well beyond the oil industry itself.
As prices go down and storage fills up, production around the world will decline dramatically. Some of that might be the result of the coronavirus infecting and disrupting operations in different parts of the world. Some of it might be the result of decisions by countries despite an era of fractious global politics.
The world does not stand still, but that just makes it more interesting, said Daniel Yergin in the VIP room at the Russian Energy Week forum in Moscow last week, and it seemed an appropriate metaphor for the career and lifestyle of the year-old doyen of the global energy industry. Yergin was ubiquitous at the Moscow event — one moment orchestrating a man panel of energy big hitters under the bright lights of the plenary stage, the next posing happily for selfies with admirers, before heading off to private meetings with the most important policymakers in the energy world. He has devoted his life to understanding the energy industry — not just as a business activity but as a force that affects the lives of everyone on the planet — and explaining it to the rest of the world. At the moment, his view on the oil market is decidedly wary, as he explained in a conversation in between sessions at the Moscow event. Demand for will be about tied with as the lowest since the great recession. I was just looking at the materials index, and all 10 commodities we track are down. Much of the Moscow conference focused on the question of whether the oil market was entering a new psychological phase in which traditional factors — like the security situation in the Arabian Gulf — no longer apply.
INTERVIEW: Daniel Yergin — in search of the next prize in testing times
Daniel Howard Yergin born February 6, is an American author, speaker, energy expert, and economic historian. Yergin is vice chairman of IHS Markit ,  a research and information company which absorbed his own energy research consultancy Cambridge Energy Research Associates in Early in his career, Yergin worked as a contributing editor for New York magazine. In the mids,  while a post-doctoral fellow,  he began to take a particular interest in energy in his writing. According to Reuters , "since then he has given advice to every administration. His book The Commanding Heights: The Battle for the World Economy ,  written with Joseph Stanislaw , described in narrative form the struggle over the "frontier" between governments and markets and the rise of globalization. In July , he became vice chairman of IHS.
The Oil Collapse