The whole world is facing two major problems at the same time the foremost challenging social issue is the corona virus on the other hand, the conflict on the prices of oil between world’s two biggest oil producers – Russia and Saudi Arabia
Organization of the Petroleum Exporting Countries (OPEC)
There 15 member countries in Organization of the Petroleum Exporting Countries (OPEC), which is a union for the oil producing countries. Last week there was a meeting at the headquarters of OPEC in Vienna to discuss about the decreased demand of oil worldwide due to the disease outbreak i.e. corona virus. The officials of Russia were also invited due to the pact OPEC+ which was made three years ago however, Russia is not a formal member of OPEC
In the last week’s meeting of Organization of the Petroleum Exporting Countries (OPEC), Saudi Arabia giant of OPEC proposed a plan that all members should reduce their oil production because it would keep the prices of the oil high which would ultimately benefit the respective countries and would have a positive impact on the economy as it would increase the revenue for the members of the OPEC. Furthermore, Saudi Arabia recommended that all members should reduce the production of oil by 1 million barrels per day and Russia should cut their production around 500,000 barrels a day.
In 1960, when OPEC was initially formed, its main goal was “safeguarding the interests of Member Countries individually and collectively.” This goal remained the main aim of OPEC even in 2012 when the goals of OPEC were revised “eliminating harmful and unnecessary fluctuations” in the prices of oil. However, some of the members think that the latest actions of Saudi Arabia are absolutely opposite to those particular goals and they have caused 40% decrease in the prices of oil in just a matter of one week and definitely that is not the shared interests of the members of OPEC.
Saudi Arabia well thought about this decision because Asia is suffering from several cases of coronavirus specially China, Italy and South Korea and these countries were the main consumers of oil however the demand of oil has been decreased dramatically in these areas as their refineries and machines have been shut down for the past few months hence they have cut down the import of foreign oil approximately 20 percent
On the contrary, the Russians decided to go against the plan as they are concerned about their market share in the world and they think that at this stage standing against Saudi Arabia rather than collaborating, would help them to strengthen their economy. Moreover, the Russians think that it would have an adverse effect on the American shale industry and would weak its economy and ultimately its position in the world. Saudi Arabia did not respond leniently to the decision of Kremlin and answered by decreasing the export prices on the last weekend to start an oil price war with Russia. The export price of oil reduced by almost about $11 to $35 a barrel –the biggest one-day plummet since Gulf War 1991.
The prices of oil had major one day decline since the 1991 Gulf War and there would be more discomfort Saudi Arabia and Russia flood the marketplace with more oil. In addition to that, Goldman Sachs forecasts that oil prices could hit $20 a barrel in future.
Michael Stephens, a subordinate at the Royal United Services Institute said “It’s a strange triangular discussion from which no side wants to back down and all are going to feel the pain.”
The outcome of the Saudi’s decision is that they would be able to position themselves better by selling oil at cheaper prices assisted by very low production costs per barrel but on the other side of the coin if Saudi Arab decreases the prices of oil then it would have an impact on the prices of oil globally
The revenues of international energy companies’ large ones as well as the smaller shale-producing firms in the Texas and the Dakotas would decline, resulting in less profit. It has an alarming influence on the markets around the world, with shares in Tokyo dropping 5 percent and a top index on Wall Street falling by 7 percent, obliging trading stop shortly after open on 9th March, 2020 Monday
President of United States Donald Trump is unsatisfied with the news because as it would negatively effect on the developing economy of United States on the other hand, this news would support him for re-election in upcoming November because lower prices of oil means that the gas prices at Unites State’s pump would also be reduced which could actually strengthen his electoral chances.
The chief market analyst at AvaTrade, Naeem Aslam said to Al Jazeera “They can’t keep up this fight for long because it is killing the economies of both countries.” about the oil price war between Saudi Arabia and Russia.
How Russia will deal with the decreased oil prices?
The economy of Russia is dependent upon the exports of energy. “The backbone of the Russian economy,” Krutikhin said. However, the country has safety currency reserves for such circumstances
According to the Finance Minister of Russia, the country could survive oil prices of $25 to $30 a barrel for six to 10 years, protected by the National Welfare Fund of the country, which says it could afford at more than $150 billion. Despite the fact that Russia says that it could withstand years of low prices, according to analysts it also would also be a severe shock for the Gross Domestic Product of the country
The Minister of Energy of the Russian Federation, Mr. Alexander Novak posited his support for the OPEC+ because he observed that it caused additional revenue of more than $83 billion for the federal budget of Russia. Likewise, the Russian-Soviet analyst stated that this decision would cause a great trouble for the Russians who used to depend upon the imports or imported goods
“I don’t think the Rouble is going to recover,” Mikhail Krutikhin said. (Russian-Soviet analyst)
Putin made a surprise appearance at a parliament session and he referred to the falling prices of the oil and said that their economy would reinforce and manufacturing industries would become better and stronger
The director of the Levada-Centre, Russia’s sole autonomous researcher Lev Gudkov, said that the popularity of Putin could take a hit as upshot of the economic recession although probably not instantly. Moreover, he said that if the crisis would continue for a long period then it would severely impact the economy of Russia and the reputation of Putin would be ruined and his popularity would decrease dramatically from 25 to 35 percent.
Additionally, Russians are ready to face the critical circumstances for example the producers of the Russia are being optimistic as one of the most popular businessmen of Russia and the president of LUCKOIL, Russia’s main oil company, Vagit Alekperov said “It’s not the first time that crude falls”. Mr. Vagit told investors that in his experience of 52 years, he has come across various ups and downs in the price levels of oil from $2 to $146. “We are used to operating in a volatile environment.”
No one knows that for how much time this fight would be prolonged. Maybe months. Maybe years. Because both of the leaders in the war, Vladimir Putin and Saudi Crown Prince Mohammed bin Salman, are proud as a peacock and each of them believes that their country has the best weapons and economy also their country could fight and win the oil price war.