The oil price crash startled the global market which was already apprehensive regarding the influence of the novel corona-virus pandemic on world economy. The plunge has been exacerbated by the dwindling demand of oil given the worldwide spread of the virus. The situation ignited a succession of cuts in oil prices.
The contagion has negatively affected the energy requirements across the world, primarily in China that is the largest importer of crude oil. However the virus that was first reported in China has now been declared a pandemic causing cancellation of majority of international flights and halting of industrial units. Assets and markets throughout the world have been poorly affected by the price slash.
In hindsight, the price crash was set off by the Kingdom of Saudi Arabia as the state steeply slashed the oil prices. The act was in retaliation to Russia. During the OPEC+ meeting in Vienna between Organization of the Oil Producing Countries (OPEC) and its ally Russia, the festering inconsistencies in their outlook on oil prices finally came out in the open.
The current oil price cuts will reduce the oil import bill of the country. On the other hand, the Oil and Gas Exploration and Production sector, would be poorly hit by the lowered prices
Saudi Arabia asked the Russian representatives to reduce their oil supply so that the prices of oil in the international market could remain higher during the coronavirus pandemic. Russia had participated in Vienna meeting inclined to curtail the growth of U.S. shale production. Despite the willingness to find a middle ground, Russia declined to put a restriction on the volume of oil it has been producing.
Saudi Arabia thus started an oil price war between OPEC, Russia and U.S. Russia has turned weary of the policy of reducing its oil supply in order to ensure stability of oil prices; and is of the view that such a strategy provides greater growth opportunity to the U.S. shale firms.
The current oil war appears to be one with no clear winner. All parties will face monetary loss irrespective of the buyers they may retain. However, they have been gauging their success in the energy market on the basis of their market share irrespective of the sale price. With the continued tanking of oil prices, and fast spreading pandemic, U.S. oil firms are declaring budget cuts.
Shale oil had brought with it economic boon and lower oil prices will be detrimental to the U.S. oil companies. Although U.S. oil firms got caught in the middle, yet U.S. still continues to be the largest oil producer in the world. Following the current trajectory, Saudi Arabia is expected to take second spot. In the case of the OPEC states, though their production cost is the minimum.
However, they are required to maintain a relatively higher price around $70 per barrel to avoid a deficit as they have high consumption rates and offer subsidized prices for their populations. Moscow claims to be well-shielded from the Saudi price cut as its budget is set up on a rather low price of oil. However, it is expected to depreciate a little from its place in the energy market.
The party to bear the greatest burnt will be the oil dependent countries. It is foreseen that the tussle might culminate only when Saudi Arabia will successfully resume its position as the oil market leader. For Pakistan, the decrease in oil prices will be beneficial for the state in terms of the macroeconomic indicators as the imports of the country are oil-based.
The current oil price cuts will reduce the oil import bill of the country. On the other hand, the Oil and Gas Exploration and Production sector, would be poorly hit by the lowered prices. In addition, it is not expected that the consumers in Pakistan would get to benefit directly from the lower oil prices in the international market.
Fareha Iqtidar Khan holds an M.Phil in International Relations from NDU, Islamabad and teaches Pakistan Studies at IIUI and is an Instructor of Development Support Communication at AIOU. She also works as a freelance researcher at NDU, Islamabad. She has contributed pieces for The Muslim Vibe, Pakistan Observer, the Daily Times, and other newspapers. The views expressed in this article are the author’s own and do not necessarily reflect the editorial policy of Global Village Space.