US president Donald Trump has been struggling to make his mind up about falling oil prices. Last month he described the prospect of lower petrol prices as “the greatest tax cut”. On Thursday, he said that a possible agreement between Russia and Saudi Arabia to cut production — and lift prices — was “GREAT for the oil and gas industry”. His conflicting messages reveal a truth: the price collapse, possibly the biggest in history, has the power to force a rethink on even the biggest advocates of cheap oil.
The collapse in prices will not deliver much of a boost to rich economies. The fall below $20, the lowest level since 2002, reflects a plunge in demand as the US and much of Europe went into lockdown and economic activity ground to a halt. There is no boost in spending power from cheaper oil when few are still burning it: planes are grounded and drivers are staying in. With large parts of the western world shut down, the effect of these lower prices will be felt most in poorer countries. Big importing — and populous — nations such as India and China will benefit, with cheaper oil potentially ameliorating some damage from coronavirus. Others, like Nigeria, will be hit twice: via a public health emergency and economically, as the price of its main export drops.
The first fall in the price came in January when China put the city of Wuhan under quarantine, subduing demand. The ensuing price war between Russia and Saudi Arabia only exacerbated the drop. Further falls reflect the collapse in economic activity: demand is down by roughly a quarter already. That is almost the entire output of the 13-nation Opec group. The millions of extra barrels being pumped by Saudi Arabia and Russia are relatively insignificant in the face of the 25m-barrels-a-day fall in demand due to the shutdowns.
Both countries appear to have badly miscalculated. Russia, opportunistically, saw the coronavirus as a chance to launch a broadside against American shale producers and the US economy. If demand was falling anyway, why not rely on others to make output cuts and hurt a geopolitical rival in the process? Saudi Arabia did not play ball. A shock-and-awe strategy of increasing its own production sent oil prices tumbling and wiped billions off the market value of western majors. The price of oil initially dropped at its fastest rate since the Gulf war in 1991; it went on to have its worst quarter on record.
Neither country could have predicted such a fall in demand. Coronavirus has spread much more rapidly than expected and the lockdowns that democratic governments have launched in response have cut demand for the world’s most important energy source. Attempts to force US shale producers out of the market will work only in the short term. Drillers may be forced to close and those that lend to them will take some losses. Once prices start to recover — and many Opec governments require higher levels to balance their budgets — new ventures will spring up. Few expect Russia’s struggling economy to be able to cope with such low prices for an extended period.
Mr Trump’s intervention boosted prices. That might reflect wishful thinking and the lobbying of the shale industry more than anything else. But Saudi Arabia did very quickly convene a meeting of the Opec+ group, which includes Russia. There are growing signs of an acknowledgement of the need for co-ordinated cuts but markets will need clarity before prices stabilise. An extended period of volatility may accelerate debate about the merits of a shift away from oil to cleaner fuels. But in the meantime, it is hardly what a struggling global economy needs.
Source: Economy - ft.com
