"Three Kingdoms Kill" Oil Price Embedded in New Crown Outbreak
Text / Yang Cheng
Published on 2020.4.20, the 944th issue of China News Weekly
On April 12, the second emergency negotiation of the OPEC + around the production reduction agreement ended with the concession of other oil-producing countries to the “nail households” in Mexico. This also means that the oil price war, which began on March 8th due to Russia and Saudi Arabia ’s concession, ended in peace and compromise. The buyers and sellers of the international energy market can finally let go of their uneasiness for the time being.
For more than a month, this complex game has been deeply embedded in the new crown epidemic that is spreading around the world and destined to bring huge negative assets to the international economy. It has experienced roller coaster-like repeated toss and brought huge panic to the international financial market. And shock. Except for Saudi Arabia and Russia, which are rushing to the front, the "key man" behind this game is the United States. As the top three in global energy production and exports, Russia, the United States and Saudi Arabia have jointly shaped the main agenda and final outcome of this round of oil price wars.
Game of "strategic triangle"
In the first decade of this century, the continued increase in energy demand has spawned high oil prices. However, in recent years, the international energy market has been completely different, showing obvious structural changes in oversupply. Crucially, the "Shale Oil and Gas Revolution" has boosted US domestic production and made it capable of challenging Saudi Arabia and Russia, two traditional energy exporters. Russia, Saudi Arabia and the United States form an energy strategic triangle. As Russia continues to expand its influence in the Middle East through the Syrian crisis, the interaction between the three has become very subtle. On the other hand, Saudi Arabia is the largest and most determined ally of the United States in the Middle East. The relationship between Russia and Saudi Arabia has improved significantly, making the competition and cooperation between the three parties more complicated than before.
Three years ago, Russia and Saudi Arabia carried out effective cooperation within the framework of "OPEC +", and cooperated with other OPEC countries to jointly implement the strategy of reducing production and price, trying to maintain the balance of payments. For the two countries, the former's concern is to offset the impact of the US-led Western sanctions after the Ukrainian crisis, while the latter hopes to achieve economic structural transformation as soon as possible and bid farewell to a single energy export model.
Dramaticly, from this agreement on production cuts, the United States has become the “salvage of the fishermen”. At the same time as oil prices have risen, the United States, which has relatively higher mining costs, has been able to use higher oil prices to expand its production capacity and market, and squeezed out Saudi Arabia and the "millennial second" Russia, which had always ranked first in terms of production and market share. Behind him. As a result, the United States, an atypical oil exporter, has effective leverage that exerts extensive influence on the international energy market. When the global economy enters the downward channel, for Russia and Saudi Arabia, which are highly dependent on commodities such as energy, maintaining market share and increasing export revenue are of strategic significance.
Subject to the slowdown in global economic growth, especially the systematic impact of Sino-US trade frictions on the international economic system, the international energy industry has long since entered the era of the buyer's market, and the good days of high oil prices are gone. The outbreak and spread of the new crown epidemic in early 2020 have worsened the fiscal revenue and expenditure capabilities of non-OPEC oil-producing countries such as OPEC and Russia, which have been declining in profitability. At the same time, the strategic goals of seeking to stabilize market share and increase export earnings Difficult to achieve. Under this circumstance, Russia and Saudi Arabia had serious strategic differences, which eventually ignited the fuse of the oil price war.
For Saudi Arabia, reducing production and maintaining oil prices is a rational choice. According to past historical experience, when the supply side end converges significantly, the imbalance in the supply and demand structure will be corrected. According to the basic laws under the conditions of a complete market economy, international oil prices will definitely rise at this time. This is also the common practice of dealing with developed oil-consuming countries in the West many times since the establishment of OPEC. Although it may not necessarily increase income, it can at least stop losses. And for Russia, the historical memory of cooperation with Saudi Arabia three years ago to reduce production is not wonderful. Therefore, the Russian energy giant, represented by the President of Rosneft Xie Qin, tried to persuade Putin authorities to abandon this model.
From the perspective of Russia's top executives, it is more wise to reject Saudi Arabia's oil production cuts out of a calm analysis of the different industrial structures and comprehensive strength of the United States and Russia and Saudi Arabia. The Russian side seems to be inclined to believe that Saudi Arabia ’s approach clearly underestimates the determination and ability of the United States to intervene and deal with the oil crisis, and it is likely to outweigh the gains.
On the one hand, there is a huge gap between Russian and American oil production. Even if Russia joins, it does not have the favorable conditions to crack down on the US energy industry; on the other hand, even if American shale oil producers fall into a low-profit crisis, they can still use mature financial leverage to obtain Support from all parties including the US government. Based on this, Russian energy giants such as Xie Qin judged that reducing the oil market share of the "OPEC +" countries would only have a positive impact on US shale oil producers. According to Russian media reports, the Russian economy is clearly unable to bear the high cost of starting an "oil war" with the United States, so it is unwilling to join this "impossible task."
Due to Russia and Saudi Arabia's unwillingness to compromise with each other, the OPEC + mechanism in early March failed to reach a consensus on production cuts as scheduled. In this case, Saudi Arabia threatened to release excess capacity as well, and an oil price war began.
The biggest "black swan" shock
What surprises both Russia and Saudi Arabia is that after the impact of the new crown epidemic as the biggest "black swan" this year, the confidence in the international market has been unable to withstand an oil price that is likely to stay only at the level of psychological war between the two sides. Game. In a short period of time, the price of international crude oil futures fell by two-thirds. In the words of international energy academic giant Ye Jin, "the world oil market has never collapsed as quickly as it is now." Unlike the past situation where low oil prices have led to an increase in demand and purchases, the common wayward behavior of Russia and Saudi Arabia quickly spread to other areas and caused a catastrophic secondary crisis. The international financial markets began to fluctuate due to panic. Geopolitical issues are more complicated.
The oil price stations initiated by Russia and Saudi Arabia have also had a huge impact on the United States. Unlike Saudi Arabia and Russia, the cost price of US shale oil is relatively higher. Only when the international oil price is higher than US $ 45 per barrel can basic profitability be maintained. The sudden energy price turmoil has forced American oil companies to start laying off employees for the sake of saving money, and reducing wages has become a common practice.
Saudi Arabia and Russia have their own difficulties. For Saudi Arabia, being forced to increase production to face the battle soon had a huge negative impact. Saudi Arabia, which has been in a state of deficit for many years, has a prerequisite for achieving a budgetary balance of payments that requires oil prices to be no less than US $ 84 per barrel. Under the impact of a price war, Russian Ural crude oil once fell below $ 10 per barrel, setting a new low in more than 20 years. In the Russian budget for 2020, the benchmark oil price has been raised from US $ 42.4 to US $ 57. More importantly, the Russian ruble exchange rate also began to plunge. For Russia, where the new crown epidemic is getting worse, the elites and people at this time are more sensitive to the sudden drop in export revenue.
A temporary compromise?
Judging from the discussions between Russia and the West, the oil price war can only result in a loss of all three parties for the current big three in the international energy market, Russia, Saudi Arabia, and the United States. Therefore, it is a negative-sum game worse than the zero-sum game. A typical view associated with this is that low oil prices are beneficial to China, the world's largest consumer. The main reason is that China is gradually getting rid of the impact of the new coronavirus epidemic and industrial production is gradually recovering.
After repeated evaluations, Russia, Saudi Arabia and the United States eventually formed a basic consensus that, in the context of the global spread of the epidemic and the global economic recession, the energy exporters ’behavior of increasing production and reducing income is irrational. Leonid Grigoriev, a former deputy minister of the Russian Ministry of Economic Affairs and a well-known energy expert, clearly pointed out that in the three years since 2017, global economic growth has largely benefited from the stability of oil prices and major market participants Predictability of behavior. Obviously, under the impact of the new crown epidemic, the global economy is likely to enter a period of decay.
At a critical moment, the Trump administration launched a telephone diplomatic offensive against Saudi Arabia and Russia at the same time, frequently applying pressure. Reports indicate that Trump has had more calls with Russian President Vladimir Putin since March. Members of the U.S. Senate and the House of Representatives wrote to the Saudi Crown Prince directly, threatening to link oil production cuts with U.S. military and political support for Saudi Arabia.
On April 12, Putin, Trump and Saudi King Salman called on the OPEC + oil reduction agreement and agreed to continue to maintain contact on the issue of stabilizing the global oil market. The institutionalization of the energy strategy triangle seems to be emerging Clue. Interestingly, Putin and Trump also had another phone call that day to exchange views on the global oil market situation. This is probably a by-product of Russia-US relations that Russia did not expect at the beginning of the oil price war.
At present, OPEC + announced that it will officially reduce production by 970 barrels from May, and then gradually reduce production. The deadline for output reduction is April 30, 2022. Moreover, Saudi Arabia and other countries may also reduce production. To some extent, Russia may be right, that is, the main problem is that the demand for energy in major economies is falling sharply. As a result, the strategic significance of production cuts may be seriously reduced.
From the perspective of international energy consumption, the market expectations brought by China's resumption of production may not be able to offset the unprecedented shrinking demand of other economies such as the United States and India. According to official U.S. data, its oil demand has now dropped to 14.4 million barrels per day, which is more than 30% lower than the pre-crisis level and the lowest level since 1990. India, the world ’s third-largest oil consumer, only entered the “national blockade period” on March 25. The oil demand for that month has plummeted by nearly 18%.
Overall, the reduction in crude oil production capacity of the "OPEC +" is still too small compared to the drop in demand caused by the impact of the New Crown epidemic and the downward trend of the global economic crisis, so that it can only exert a short-term effect to boost oil prices.
In other words, the price rebound in the international market may be short-lived. Both oil-producing countries and consumer countries may have to adapt to the downward pressure of the global economy as soon as possible and adjust domestic and foreign policies. The new crown epidemic is far from over, and a temporary compromise in this case is likely to only serve as a placebo.
Therefore, for countries that are highly dependent on energy exports, such as Russia and Saudi Arabia, the key factors that determine their future development status are the scale of the financial support of the government to take counter-cyclical measures when faced with a severe macroeconomic risk environment, as well as the resilience of Resilience. At this time, whether it is Russia, Saudi Arabia or the United States, whoever laughs in the end is no longer important, and it is the best choice to work together to overcome difficulties.
(The author is a professor at the School of International Relations and Public Affairs, Shanghai International Studies University)
China News Weekly No.14, 2020
Statement: The publication of the "China News Weekly" manuscript is subject to written authorization