Oil market rout as Saudi Arabia and Russia launch a price war and the coronavirus pandemic sparks an equities meltdown.
Oil prices were headed for their worst weekly loss in more than a decade Friday after Saudi Arabia and Russia launched a price war and the coronavirus pandemic sparked an equities meltdown.
US benchmark West Texas Intermediate reversed earlier losses in afternoon trade, rising about two percent to around $32 a barrel after the US military launched air strikes in major crude producer Iraq.
But prices are still down more than 20 percent this week and on course for their biggest weekly drop since the global financial crisis of 2008.
Brent crude, the global benchmark, also jumped about two percent to about $34, erasing earlier losses — but is still down 25 percent for the week, Bloomberg News reported.
Crude markets were plunged into turmoil at the start of the week after top exporter Saudi Arabia began a price war amid a row with Russia over whether to cut output to support the virus-battered energy sector.
That triggered the biggest one-day drop on Monday since the start of the Gulf War in the 1990s.
The virus outbreak then added to downward pressure, as growing concerns about a global recession and travel restrictions — including a temporary ban on travel from mainland Europe to the US — dimmed the outlook for demand.
“The scale of the oil price crash would have economists and analysts revaluating their forecast for growth, and even increase the urgency among central bankers to cut interest rates,” said Phillip Futures in a note.
Emergency measures by central banks Thursday failed to douse concerns about the economic toll from the outbreak, and markets suffered their worst day for decades.
The rout continued in Asia Friday with stocks and oil plummeting in morning trade, although they pared their losses in the afternoon.
Analysts said oil prices were boosted after US air strikes against a pro-Iranian group in Iraq, a member of the oil-exporting cartel OPEC.
The price war started after Saudi Arabia and other OPEC members pushed for an output cut to combat the impact of the virus outbreak.
But Moscow, the world’s second-biggest oil producer, refused — prompting Riyadh to drive through massive price cuts and pledge to boost production.
Energy generation through renewable sources is improving exponentially and is something that is no longer simply better for the planet but also for investors. Nevertheless, the oil industry has no intention of voting itself out of office and will continue extracting and exploiting the planet’s oil reserves. We don’t have time to wait for investors to tire of these companies. The much-needed end of the oil industry should be brought about not by its profitability or otherwise, because it could linger on for decades, but instead through political decisions guided by scientific evidence, links to which can be found throughout this article. The writing is on the wall, and has been for years; when will we bother to read it? Follow me on Twitter or LinkedIn. Check out my website.
Enrique Dans Teaching Innovation at IE Business School since 1990, and now, hacking education as Senior Advisor for Digital Transformation at IE University. BSc (Universidade de Santiago de Compostela), MBA (Instituto de Empresa) and Ph.D. in Management Information Systems (UCLA).
Today, 8 January 2020, it appears that the US is more relaxed about oil spike than Europe – which helps explain differences over Iran, according to Mueid Al Raee, of United Nations University.
Oil prices shot up following the US assassination of Iranian general Qassem Soleimani, rising more than US$5 per barrel to more than US$71 (£54) on January 6, its highest level since the Saudi oil refinery attack last September. Brent crude has since eased to around US$69 at the time of writing, though there is much discussion that it could climb a lot higher if the current crisis leads to an all-out war.
In keeping with many recent developments in US-Iranian relations, the Europeans have taken a dim view of America’s decision to take out the military commander. When trying to make sense of the very different approaches Iran on either side of the Atlantic, one factor that is often overlooked is that the US and Europe are affected in different ways by a rising oil price.
People tend to see more expensive oil as bad news for the global economy, but the reality is that it’s not necessarily bad for America. It may be that, in continuing to provoke Iran, driving up the oil price is almost seen by the Americans as an added incentive.
The complex oil effect
Oil pricing and its associated effects are often more complex than portrayed. As citizens, we are most often concerned with the price of fuel for our cars and the cost of heating our homes. This is the first way that oil prices affect the broader economy: if consumers have to spend more on fuel and associated taxes, they have less to spend elsewhere – and this can lead to a global slowdown.
Like all countries, the US is affected by this. Yet on previous occasions where US actions on the geopolitical stage drove up oil prices, there were also benefits to the country’s economy. Take the 2003 invasion of Iraq, which ushered in a period that would see the price of Brent nearly triple by the end of the decade. This led to a wave of investment into the US shale oil sector, which would eventually account for approaching two-thirds of the country’s total oil production.
Brent crude price, 1940s to present day
The trouble with shale oil is that it is expensive to produce, with average break-even of fields not far below US$50 per barrel. Shale oil wells also produce most of their oil in the first year of production, which means that producers have to continually drill new wells.
Due to the lower prices of the last few years, a large number of oil-related companies in the US have filed for bankruptcy, including both producers and services businesses. And while US production of shale oil managed to continue rising impressively throughout this period, mainly thanks to the bigger producers, it has been slowing down markedly in recent months.
If the oil price now trends higher, it could well mean that shale oil production in the US can resume its upward march. It also raises the prospect of US oil services companies earning more both locally but, most importantly, from foreign oil-production ventures, since there is a well-established correlation between their stock price and higher oil prices.
At the same time, six of the last eight recessions in the US were followed by high oil prices. One reason why this was not a hindrance for the economy is that, in the longer term, stable higher prices promoted the development of more energy-efficient technologies within the country.
The Americans can also argue that there are some longer-term economic benefits to higher oil prices that can help everyone. Oil-producing countries with surplus cash from oil profits invest in foreign technology and foreign assets. At the same time, oil-importing countries innovate to mitigate the profit-reducing effects of higher oil prices. These are both ultimately good for economic vibrancy and growth.
On the other hand, there are advantages to cheaper oil that are particularly important to countries in Europe – including the UK – because, unlike America, they are not oil self-reliant. Lower oil prices are shown to be beneficial for Europe’s highly energy-intensive economies and are expected to help with job creation. During the oil price drops of 1986 and the early 1990s, for instance, energy-intensive industries in Europe increased their earnings. Consumer product businesses and European airlines benefit from lower oil prices, too.
What happens next
Whether or not the Americans actually want higher oil prices, there are certainly good economic reasons why they probably won’t mind them. Deepening the chaos that started with the US withdrawing from the West’s nuclear deal with Iran is an “easy” way to achieve higher oil prices while meeting other strategic objectives.
Yet how the Europeans, China and Russia respond will also determine the global flow of oil from Iran and Iraq. Whatever the ultimate pros and cons of a higher oil price from an economic point of view, the Europeans clearly have more reasons to be unenthusiastic than the US. If the new exchange and payment instruments that have been developed by Europe to circumvent US sanctions are effective, and the US does not escalate the conflict, it may yet mean that oil prices remain stable at current levels.
Sukru Cildir of Lancaster University wonders how Saudi-Iranian oil rivalry has been shaped by American power. It has not historically been going for a long time and the recent decarbonisation wave sweeping the world does not seem to affect either party.
The relationship between Saudi Arabia and Iran, both oil-rich states in the Middle East, has oscillated from co-operation to conflict throughout history. Alongside a range of factors that shape their rivalry including sectarianism and nationalism has been the politics of oil.
Oil is a strategic international commodity, and its use as a political tool is widespread. Its role in the Saudi-Iranian rivalry can’t be understood without unpicking the international context, and the power structures that govern the way countries interact with each other. At the heart of this is the dominance of the US over this international system.
The dynamics between the US, Iran and Saudi Arabia over oil were laid bare in September 2019, after a series of drone attacks on Saudi oil facilities. The attacks caused the suspension of 5.7m barrels per day (mbpd) of crude oil production, nearly half the Saudi output.
The Houthis, a Yemeni faction, claimed responsibility. However, American and Saudi government officials accused Iran of committing these attacks. In return, the Iranians blamed foreign forces in the region for the insecurity and told the US to leave the area.
While the Saudi-Iranian oil rivalry is ostensibly the business of these two countries, it has always had an international dimension, overshadowed by the US.
The 1979 Iranian revolution marked a turning point for the place oil played within the Saudi-Iranian relationship. Before then, both countries were important allies of the US, a position which brought with it political and economic benefits, particularly to their oil industries. But the 1979 Islamic revolution in Iran paved the way for a separation of paths.
As a result, ever since 1979, the Iranian oil industry has been subject to American pressure, through a range of economic sanctions and embargoes, which has crippled Iranian oil production. Iran has been unable to reach the level of oil production of over six mbpd that it had in the pre-revolution years. Meanwhile, Saudi oil production reached over 12 mbpd in 2018.
This led to the Iranian oil industry being deprived of necessary foreign investment and technology transfer, and it has fallen behind Saudi Aramco, the kingdom’s state-owned oil company, and other regional competitors. Saudi Arabia has largely backed the US policy of isolating and sanctioning Iran, particularly the Iranian oil industry, which has, as I’ve argued elsewhere, contributed to the ongoing tensions in the Saudi-Iranian relationship.
As Saudi Aramco prepares for an IPO in December that could make it the world’s biggest publicly listed company, Iran is desperate to revitalise its own outmoded oil industry. As Iranian oil minister Bijan Zanganeh admitted in early 2019, many of Iran’s ageing oil facilities are in fact “operating museums”.
The US continues to have such an influence on Middle Eastern oil politics because of the way it has successfully pushed its own international agenda since 1945. After World War II, the US cemented its dominance over an international system built on the basis of liberal and capitalist principles. While the US rewards its allies with economic and political benefits, it punishes its challengers through a range of political and economic measures, not least economic sanctions.
Oil became a strategic international commodity in the post-World War II period, and began to play a pivotal role in the way the US maintained its global dominance. To do this, the US aimed to open up and transnationalise oil-rich economies in the Global South such as Saudi Arabia and Iran, to both promote its national interests and solidify its privileged position within the current system.
Accordingly, the supply of Middle Eastern oil into international markets without disruption – and at a reasonable price – became an essential instrument for maintaining American dominance, even though the US didn’t need to import oil from the Middle East.
A world of US dominance
The political economist Susan Strange provided a theoretical framework back in 1987 to explain the structure of US dominance over the international system through four main dimensions: production, finance, security and knowledge. This is also a useful way to understand how the US shapes the international oil market – and the Saudi-Iranian rivalry.
By 2018, in the wake of a shale boom, the US became the largest oil-producing country in the world by reaching production of 15 mbpd. Financially, oil has been priced and traded in US dollars, in particular since the early 1970s when a series of negotiations and agreements linking the sale of oil to the US dollar were made between Saudi Arabia and the US. This has increased global demand for US dollars, and helped the US deal with its trade deficit and keep its interest rates low. It has also helped the US to monitor the petroleum trade by controlling global bank transfers.
The US also stands as a main security provider to oil-rich Gulf monarchies, with publicly acknowledged military bases in over 12 countries in the Middle East. Additionally, it has a supremacy over global knowledge, most obviously through its continued domination and control of the sector’s technological needs. By leading global innovation and technological development in the shale revolution, for example, and having the highest budget for research and development, the US largely controls global technology transfer. This has also deprived Iran of necessary technology, capital and know-how to modernise its ageing oil industry, constraining production.
Therefore, despite the fact that the Saudi-Iranian oil rivalry seems like a regional issue, the role of American power in a globalised world has been key to shaping this regional political competition over oil.
The key factors of all energy policies across the MENA are about reducing carbon emissions and conserving hydrocarbons reserves per this article, dated September 30, 2019, of Power Technology reporting (see below) on the latest World Energy Council’s congress of Abu Dhabi, early this month.
With an estimated $100bn-worth of renewables projects under study, design and in execution across the region, the policy momentum behind energy transformation is now being converted into new, potentially lucrative business opportunities across the Middle East and Africa.
Reducing carbon dioxide emissions and conserving hydrocarbons reserves are key factors shaping energy policy in the Middle East and North Africa (MENA).
But it is the more immediate combination of lower oil prices and the fall in the cost of renewable energy technologies that have seen every country in the region announce ambitious clean energy targets.
Clean energy, which includes renewables such as solar and wind power, as well as alternative fuels including waste-to-energy and nuclear, accounts for only a small proportion of electricity generation in the MENA region today.
Change is coming
According to the International Renewable Energy Agency (Irena), installed solar and wind capacity across the MENA region reached respectively 2,350MW and 434MW in 2017, up from just 91MW and 104MW in 2010.
And with an estimated $100bn-worth of renewables projects under study, design and in-execution across the region, the policy momentum behind energy transformation is now being converted into new, potentially lucrative business opportunities in the region.
The significance of the region’s energy transition was clear to see at the latest edition of the World Energy Congress, which was hosted in Abu Dhabi in September.
Unsurprisingly, Saudi Arabia’s pavilion was the most-buzzing hive at the congress.
In addition to its broad programme of structural economic reforms and the recent appointment of a new energy minister, the region’s biggest economy has by far the most ambitious clean energy programme planned in the Middle East.
As Riyadh’s Renewable Energy Project Development Office (Repdo) outlined plans to launch tenders for its third round of its ambitious National Renewable Energy Programme (NREP) before the end of 2019, representatives from Saudi Arabia’s sovereign investment wealth fund, the Public Investment Fund (PIF), were meeting technology providers on the sidelines of the event to discuss the opportunities for building large-scale solar manufacturing facilities in the kingdom.
While solar and wind power are the main focus of the region’s energy diversification plans, some of the world’s largest energy companies were keen to showcase the potential for emerging technologies including waste-to-energy.
Another glimpse into the future was provided by discussions about the potential to store energy from peak-power sources such as solar and wind.
With the race to achieve cost-effective battery-storage solutions already underway, other technologies using hydrogen are being piloted in the region to offer another method to mitigate the intermittency issues of solar and wind power.
The challenge facing the region’s utilities is to convert their ambitious clean energy ambitions into actual investment projects.
This article is sourced from Power Technology sister publication http://www.meed.com, a leading source of high-value business intelligence and economic analysis about the Middle East and North Africa. To access more MEED content register for the 30-day Free Guest User Programme.
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