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CORONAVIRUS

Is coronavirus to blame for the slump in world oil prices?

World wide oil production is affected by the coronavirus
World wide oil production is affected by the coronavirus REUTERS/Nick Oxford

The coronavirus crisis has sent oil prices tumbling; economic forecasts for many countries are gloomy as companies are forced to close down. But is the virus really the culprit?

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On Monday, world oil prices fell about 25 percent. On the surface, this can be ascribed to the global coronavirus scare, which has caused people to consume and travel less, causing airlines to cancel flights, even bankrupting some.

But while prices hovered around 60$ per barrel last week, policy decisions by two of the world’s biggest oil producers, Saudi Arabia and Russia, sent prices to their lowest level for a decade.

“Overproduction has been a concern for a number of the oil producers,” says Antony Frogatt, senior energy researcher with international affairs think tank Chatham House. A slump in oil prices was already underway; conditions just got worse with the coronavirus crisis.

Declining market

On 6 March, “Opec+” (the 14 member states of the Organization of Oil Producing and Exporting Countries plus the world’s second-largest producer, Russia) discussed the possibility of cutting production and stabilising the declining market.

“There was a proposal from Opec to cut Opec+ production by 1.5 million barrels per day (bpd) until the end of June this year,” says Francis Perrin, Chairman Energy Strategies and Policies in Paris.

“Russia refused, and there was no agreement.”

The immediate result was that prices declined by 8 percent.

But the big blow came on 8 March, when Saudi Aramco, the world’s largest oil company, unilaterally announced that it would increase its production by 1 million bpd from 12 to 13 million. The Saudis also announced a price cut of between 6 and 8$ per barrel.

Price war

“It was the beginning of a price war,” notes Perrin. Prices fell another 25 percent and have hovered since at around 30$ per barrel.

Moscow was quick to point out that it ‘could deal with 25-30$/barrel for a period of up to five or six years. But analysts are sceptical.

“Russia may well claim that it would survive for five years, but oil is a significant part of its revenue. So if it is only just getting production costs from the sale of its oil, then its national revenue is significantly impaired,” Perrin says.

Russia is currently the world’s second largest oil producer. The US recently took first position as a result of its increasing exploitation of shale oil. But this, says Perrin, is also America's weak point.

“The US is increasingly producing non-conventional shale oil, that is costly to produce,” he points out, while Saudi Arabia enjoys the world’s lowest oil production costs.

Ups and downs

The recent fall in oil prices is just the latest shift in the roller-coaster graph of world oil prices over past decades.  

Crude oil prices 1946-2020
Crude oil prices 1946-2020 © Macrotrends

The first big oil shock was in 1973, when Opec decided to impose an oil embargo on the US and its allies after then President Richard Nixon requested $2.2 billion worth of emergency aid for Israel. The oil price that was around 20,83$/barrel more than doubled within a month to 55,50$/barrel.

Prices then remained stable at around 58$ but saw another massive spike in 1979 after the Iranian revolution and the coming to power of Ayatollah Khomeini. Iranian oil production dropped by 4,8 million bpd in January 1997 (7 percent of world production at the time.) Prices eventually peaked at 124$ in May 1980.

Global glut

In 1986, as a result of oversupply, prices slumped again and, until the early 2000s, remained under the 50$/barrel mark (with a 77$ peak as a result of the First Gulf War), to the absolute low of 17,96$ in November 1998, after an Opec meeting failed to agree to address the global glut the oil market was suffering at the time ... only to start its biggest increase ever, reaching its top in June 2008 at an astronomical 165$/barrel then again collapsing, within months, to just over 50$/barrel as a result of the global financial crisis.

The largest oil price drop in modern history took place between mid-2014 and early 2016, attributed by the World Bank to supply factors as booming US shale oil production and deteriorating global demand.

Not a done deal

The latest roller coaster nose-dive may introduce another period of low oil prices and a general slump in the industry.

“After Russia rejected the Opec proposal, clearly at the highest level of the kingdom, there was a decision to change the strategy of Saudi Arabia,” says Perrin.

“That strategy is aimed at the protection of its own market share, and is not to be limited by a certain level of oil prices.

“So it is a huge strategic change for Saudi Arabia, which will have a big impact on the oil markets, in the coming weeks and months, unless Opec+, especially Saudi Arabia and Russia, try to reach an agreement in the coming weeks. But it is not going to be an easy task. And certainly not a done deal,” he says.

How long before things get back to normal?

“Usually the situation doesn’t go back to exactly as it was before,” says Frogatt.

“If there is a sustained period in which people are flying less and businesses move to more online conferences and change the way in which they interact with people, they will put in place technologies, and people will be trained in technologies they previously hadn’t used, I suspect that many people would prefer not to travel so much, not to fly so much,” he says.

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