Unless oil prices move back up to the levels before the COVID-19 pandemic, the U.S. shale industry could collapse, the Institute for Economics & Peace, an Australian think-tank, warned in a new report on Wednesday.
Moreover, the oil price plunge will likely affect the political regimes of some of OPEC’s largest producers, including top producer Saudi Arabia and the second-largest producer Iraq, as well as Iran, the think-tank said.
“The sharp fall in oil prices will affect political regimes in the Middle East, especially in Saudi Arabia, Iraq and Iran, which may result in the collapse of the shale oil industry in the US, unless oil prices return to their prior levels,” the Institute for Economics & Peace said in its report ‘Covid-19 and Peace’ published today.
The U.S. shale industry has curtailed production in recent months in response to the very weak oil prices in March and especially April, when the prompt-month WTI Crude futures contract flipped negative a day before it expired. In recent weeks, however, emboldened by the relief rally in oil in May, some U.S. producers have restarted part of the curtailed production. Analysts warn that the restart of some production is premature and could depress oil prices in the coming weeks, in view of the still uncertain trajectory of global oil demand recovery.
Morgan Stanley, for example, said earlier this week that oil prices had likely risen too fast too soon with the market focusing on supply cuts, while global oil demand may not return to pre-COVID-19 levels before the end of 2021. Related: China Set To Ramp Up Natural Gas Imports This Decade
Goldman Sachs, for its part, turned bearish on oil again, saying this week that the relief rally in oil may be coming to an end as oil market fundamentals are turning bearish once again. Brent Crude prices could slip back to $35 a barrel in the short term, Goldman Sachs said on Monday, citing still uncertain demand recovery and returning production from the U.S. and Libya.
Early on Wednesday, at 7:30 a.m. EDT, both benchmarks were down by more than 2 percent, with WTI Crude down 2.7 percent at $37.93, after the American Petroleum Institute (API) reported on Tuesday a large crude build in U.S. oil inventories.
By Tsvetana Paraskova for Oilprice.com
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And with a breakeven price ranging from $48-$68, shale oil drillers need an oil price above $70 to start raising production. A plunge in oil prices to the $30s could lead to the collapse of the US shale industry and its eventual bankruptcy.
And contrary to the report’s conclusions, only Iraq among OPEC top crude oil producers could be vulnerable to political upheavals with a plunge in oil prices. The reason is that oil exports continue to dominate Iraq’s economy. Oil accounts for more than 65% of GDP, 90% of budget revenues and 94% of Iraq’s exports. Moreover, Iraq has no sovereign fund to lean on in times of financial difficulties.
Though oil accounts for roughly 87% of Saudi budget revenues, 90% of export earnings and 42% of GDP, Saudi Arabia can survive a plunge in oil prices because it has a sizeable sovereign fund to tidy it up until oil prices improve.
Iran, on the other hand, has the most diversified economy in the Gulf region. Oil only accounts for 15% of its GDP so it is far less dependent on oil and therefore far less vulnerable to volatility of oil prices.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London