It may seem that the worst-case scenario has already come to pass, as United States crude prices plunged far below zero on Monday, with the West Texas Intermediate crude benchmark closing out the day at negative $37.63 per barrel and the international Brent Crude benchmark hitting an 18-year low. While oil prices have since recovered considerably, however, many industry experts say that it’s more than likely that we haven’t seen the worst of it yet. The problems that drove oil prices so low to begin with still persist. It all began with a drop in oil demand as the novel coronavirus epidemic turned into a pandemic as it spread around the globe, shutting down major economic sectors and supply chains. When Russia and Saudi Arabia, the leading members of OPEC+, met to strategize, however, the talks turned sour and quickly devolved into an all-out oil price war and an oil glut of a whopping 10 million barrels of oversupply per day. When the oversupply threatened to exceed available storage, owning oil became a liability, and oil prices plunged below zero in the U.S.
“Can Brent Crude oil follow WTI into negative territory?” Bloomberg asked its readers this week. Answer: “You Bet.” If the international oil markets follow the United States’ lead, it’s going to lead to a full blown existential crisis for the energy industry. Now that we’re seeing what happens after oil goes negative play out in real-time, the next question is: what happens if the oil industry doesn’t recover?
“The collapse of the oil market,” speculates Slate’s Fred Kaplan, “might unleash something more serious and enduring in certain regions of the world in the coming months: socioeconomic breakdowns, political disruptions, and shifts in the balance of power.” The ramifications will be greatest for the nations who rely most heavily on oil for their gross domestic product, with a particularly grim forecast for the oil autocrats leading petro-states such as Saudi Arabia, Russia, Azerbaijan, Iran, Iraq, Qatar, and Kuwait, to name just a few, who will struggle to keep their power if oil loses its influence.
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60 percent of Saudi Arabia’s GDP comes directly from oil revenues. Oil sector earnings account for over 60 percent of the government’s total budget, and almost 75 percent of national exports. Incredibly, Iran, Iraq, Qatar, and Kuwait are even more dependent. the dependency is greater still. Only slightly less dependent, one-third of Russia’s GDP, half of the budget, and two-thirds of the nation’s exports come directly from oil revenues. “By contrast, oil accounts for just 8 percent of U.S. GDP — a significant share, with bruising effect in certain states, especially Texas, but not the looming force that it is in many other countries,” writes Kaplan.
This is all going to lead to major instability and geopolitical tension, especially in the Middle East. “With coronavirus lockdowns causing a drastic reduction in demand for oil, many of these countries won’t be able to pay their bills, bribe their military officers, or provide basic social services to their populations.”
While Russia and Saudi Arabia both have significant sovereign wealth funds (“Russia’s amounts to $150 billion, Saudi Arabia’s to more than twice that sum”) to help them get through a short-term oil price crisis, a prolonged downturn of the severity we’re currently experiencing could lead to serious fallout and even conflict.
And then there are the countries that have no economic cushion to fall back on at all: Venezuela, which is already suffering from one of the worst economic crises in modern history, is almost 100 percent dependent on oil for the little money they do take in. Ecuador is in only a slightly better position, and bracing for their economy to contract by a whopping 4 percent from a loss of oil revenues alone.
These countries will have to diversify their economies no matter what. The demise of the oil industry is an inevitability as the world moves away from greenhouse-gas intensive fossil fuels and toward renewable energy alternatives, and even Saudi Aramco has admitted that they expect peak oil by mid-century. They just didn’t expect it overnight. Petro-states will be a thing of the past in a matter of decades--the question is, will they go out with a bang or a whimper? Hopefully, for the sake of global security and the millions of citizens depending on petro-states for their livelihoods, it will be the latter.
By Haley Zaremba for Oilprice.com
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This is a different case from when Iraq attacked and occupied Kuwait after Saudi Arabia and Kuwait instigated by the United States flooded the global oil market to precipitate an economic collapse of Iraq having won the war against Iran but was exhausted economically.
Yet, if there is to be a war in the Middle East, it will be started by the United States against Iran. Through its history, the United States has always started a war somewhere when its economy was in bad shape. A new working paper from the National Bureau of Economic Research says that US GDP could contract by 11% in the fourth quarter of 2020, year-on-year. An estimated 22 million people filed for unemployment insurance in the last few weeks in the US and many of those jobs may not come back later this year.
No matter how low oil prices may crash, they are going to rebound equally high even going beyond $100 a barrel. The minute the global lockdown eases, oil will be poised for a major comeback.
If anything, the coronavirus outbreak has proven irrevocably how inseparable oil and the global economy are by demonstrating that destroying one automatically destroys the other and vice versa. Oil is the driver of the global economy. Without oil, there is no global economy and no civilization as we know it.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London