Oil-Price Collapse Raises Questions Regarding the Resilience of Oil Markets

Views from the Region

5/7/2020

The collapse of oil prices has increased the pressure on the regional economies, many of which were already reeling from domestic instability and the global health pandemic. What initially started as a spat between Russia and Saudi Arabia has now grown into a full-blown crisis that has many wondering whether the oil market can ever make a comeback. Others are beginning to look nervously at the liquefied natural gas (LNG) market noting its similarities with the oil market and calling for an OPEC for gas producers. Given the implications for regional markets as well as regional economies, it is not surprising that many are now calling for a loosening of restrictions imposed in response to the COVID-19 pandemic, as well as a reconsideration of economic growth models.

For Daily Sabah’s Taha Meli Arvas the responsibility for the oil-market crash lies partly at the feet of OPEC and its member states, which have been incapable of mediating between their competing interests, arguing that the underlying dynamics of the crash started “In early March, [when] Saudi Arabia and Russia got into a fight. The Saudis wanted to cut the production of oil so as to increase prices, but the Russians didn’t. Things came to a head at the OPEC+ meeting, and Saudi Arabia, in an apparent attempt to spite Russia, voted to increase production…. No one could have seen the effects of the coronavirus coming. A complete and utter stop to consumption? To shipping? To flights? A tail event for sure. But this is what happened, and oil kept dropping way below what the Saudis had anticipated. The Russians got the message and the Saudis and Russians agreed to reverse course a month after their falling out. But the damage was done. During the monthlong spat, oil was so cheap no one thought it could go lower.”

Al Arabiya’s Ali al-Shihabi is less concerned about pinning the blame on one party or the other. Instead, he uses the current instability in the oil market to make an argument for the diversification of Saudi Arabia’s economy, while conceding that such realignment will take at least a generation to carry out: “Oil is the lifeblood of the Saudi economy (not just a small part of a multitrillion-dollar economy like shale is to the US) and will continue to be for the foreseeable future. The diversification of the economy away from oil is a long-term goal for the Kingdom of Saudi Arabia. It will create export industries that compete globally and will be of sufficient size to replace the revenue generated from oil. But this will take time. The Kingdom’s Vision 2030 is exactly that, a vision, and a signal to the Saudi people of how determined Saudi leaders are to accelerate the process of diversification. Yet, as any economist knows, the realization of this goal will require the efforts of at least a generation.”

Writing for Arab News, Faisal Faeq points out that, despite OPEC’s failure to prevent a price war between Russia and Saudi Arabia this time around, the existence of an institutional framework has benefited its member states and could do the same thing for the growing natural-gas market: “Unlike the oil sector, the world’s leading gas exporters are producing at will without a collaborative organization that effectively organizes production in line with global supply and demand. There is the Gas Exporting Countries Forum (GECF) that was established in 2001, but this is not aimed at the stability of the gas market as such. Still, members of this group control more than 70 percent of the world’s natural gas reserves, 46 percent of its marketed production, 55 percent of pipelines and 61 percent of LNG exports globally. As inventories build and energy markets are reshaped, now could be the time for gas to follow the OPEC model.”

As to the impact of the oil crisis on regional political-power struggles, Jerusalem Post’s Seth Frantzman argues that one of the regions most affected by cheap oil is the Kurdistan Regional Government (KRG) in Iraq, which “is threatened by low oil prices as Iraq’s central government remains in crisis and budget debates continue. Baghdad is supposed to provide the Kurdish region a seventeen percent share of the Iraqi budget but has systematically cut it since 2014, alleging that crises in Baghdad and the war on ISIS made it difficult to pay the Kurds their fair share. The budget battle has eroded trust between Baghdad and the Kurdistan region’s capital of Erbil…. Oil sales have helped the Kurdish region make up for the budget shortfall. However, rapidly declining oil prices now threaten to undo the region’s gains and also force Erbil into a weaker position in discussions with Baghdad.”

The impact of historically low oil prices was also the subject of a report by Doaa Moneim, who, in a recent article for Al Ahram, cites former deputy chairman of the Egyptian General Petroleum Corporation Medhat Youssef, who noted that “global oil prices will continue to see a fluctuation as long as lockdowns and social distancing measures, which have been adopted globally to contain the COVID-19 outbreak, are not eased…. He also said that global oil enterprises and investors have been forced to add aircraft oil to diesel because flight suspensions have caused a drop in demand for aircraft fuel. Moreover, global petroleum refineries have reduced their capacity to only 17 percent. Regarding the deal by OPEC and non-OPEC countries to reduce oil production as of 1 May, Youssef said that this should be put into effect as soon as possible.”

On the other hand, there are those who believe that a temporary dip (and a subsequent rise) in global oil prices are to be expected, given the current global health crisis. Writing for Asharq Alawsat, Salman Al-Dossary dismisses fears regarding the future of the oil market since, as he puts it, one “does not need to be a genius to realize that the chaos in the global oil market is caused by the coronavirus crisis. This will not mark the end of oil, because the world cannot live without it. It does not take a genius to also realize that the drop in prices will be short-lived and that it will be connected to containing the coronavirus…. Ultimately, those expecting the shock from the price collapse to last forever are ignoring that the world will eventually witness another shock, this time in the opposite direction, when oil prices will skyrocket. The world cannot support such a rise, nor can it support the persistence of the current drop.”