Oil war, a game nobody can win

Articolo
Ghazal Poorhasan
Foto di drpepperscott230 da Pixabay

The negotiations of OPEC Plus during the weekend which coincided with the Easter holidays, have reached to a rare and unusual conclusion. This level of consensus among the OPEC members and non-member oil producers over the oil market is indeed quiet uncommon. The coalition of OPEC Plus was in fact under the leadership of Riyadh and Moscow, aimed at keeping the balance between the supply and the demand in the market by controlling the oil price. The recent conflict of March between the two major producers not only broke this paradigm and brought a heavy shock to the oil market, but also raised doubts over the existence of the coalition itself. However the recent restart of the negotiations can be considered as a ceasefire to decrease such tensions.

The announcement of the increase in the oil production while the world was starting to face with the Covid 19 pandemic, which has resulted in a significant drop on demand for oil caused by the lockdown of the countries one after the other, has shaken the oil market deeply. As a matter of fact the reaction of Moscow almost brought an end to the OPEC Plus coalition while Riyadh surprised everyone by taking a very different direction from the usual OPEC policies. Both countries took the advantage of the moment of having Iran, another major oil producer, already out of the equation because of the sanctions from one side, and by outproducing American Shell from the other side, effectively putting it out of the game. However, the oil-price war between the two not only did not bring benefit for them but also endangered other producers too. Even though United States retains its technology advantage that allows to keep the production cost low, making it the most serious competitor for Russia and Saudi Arabia, the conflict between Riyadh and Moscow could have endangered American production too due to a heavy drop on the market prices. Therefore the involvement of USA in the issue was inevitable.

The conflict that brought the oil price to the lowest level in the last 18 years, seems to be getting under control after the recent meetings of Opec Plus and G20, by reaching to a consensus on bringing the balance back to the market. The reduction of American oil output, along with its compensation to Mexico that was not willing to adhere to a reduced production programme, kept all parties satisfied for the time being.

In the time of Covid 19 pandemic many states decided to close their borders to each other and lockdown all the activities and productions that were the backbone of their economy. While once more the importance of the governments on prioritizing their national interest over other states and international organisations illustrated itself strongly (a very unlikely occasion in the globalization era), it is evident that economy and oil are still far beyond the capabilities of individual states to take their decisions solely for the sake of their own national interest. The world economy is already damaged seriously by the pandemic itself, and a crisis in the oil market can be the last thing that the states worldwide are looking for. However it should be taken into consideration that as much as the oil-producer countries’ economy will suffer from the drop of price, the energy consumer countries like China will highly benefit from this saving period caused by the lockdown, which will soon pay dividends in the phase of restarting the global economic recovery.

(You can read the last article by Ghazal Poorhasan here)

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