Policy Alert #206 | March 23, 2020

In response to reduced demand for oil due to the coronavirus pandemic, the Organization of the Petroleum Exporting Countries (OPEC) proposed capping production among member states to stabilize crude oil prices. OPEC called on Russia, which is in a three-year agreement with the organization to coordinate global oil supply that expires at the end of March 2020, to abide by the new caps. Russia refused, and OPEC, led by Saudi Arabia, retaliated by increasing production. By flooding the market with oil, prices for crude oil plummeted to an eighteen-year low of $20.06 per barrel on March 18th. To protect oil producers in the United States from this price shock, President Donald Trump ordered the Department of Energy to purchase 77 million barrels of US-produced oil for the US Strategic Reserve. 

Although a drop in crude oil prices would ordinarily be a godsend for economic growth, the uncertainty of how long the dispute between Russia and OPEC will last, the substantial disruption in planning for smaller oil-producing countries and those in the process of shifting to renewable energy sources, and the mounting economic damage of the coronavirus pandemic are widely believed to negate any economic benefits. For many countries, a long stand-off could not come at a worse time. In this RPI Policy Alert, we review the Rising Powers’ responses to the crisis.

RUSSIA
Russian Prime Minister Mikail Mishustin argued that the collapse of negotiations with OPEC was no fault of the Russian side: “We did not initiate the withdrawal from the agreement [OPEC+ deal]. On the contrary, we proposed to extend the agreement on the existing terms, at least until the end of the second quarter or for a year, so as not to complicate the situation that has developed with the spread of coronavirus.” Responding to questions of whether or not Russian President Vladimir Putin planned to resume talks with OPEC, Presidential Spokesperson Dmitry Peskov replied that while there were no plans for a meeting with OPEC+ members, such a meeting “if necessary, […] will be immediately arranged.” Peskov noted that officially, however, there is no price war to address: “I want to recall that Riyadh [Saudi Arabia] itself has denied reports that there is any kind of price war, especially against Russia.”

• The flurry of coverage from Sputnik News included numerous interviews with international experts for their thoughts on the price war. An article analyzing Saudi Arabia’s potential strategies in the price war features University of Oxford energy analyst Justin Dargin, Dubai bureau chief at Energy Intelligence Oliver Klaus, and international oil economist and visiting professor of energy economics at ESCP Europe Business School Mamdouh G Salameh. Géopolia think tank founder Philippe Sebille-Lopez argued that the US’s consistent history of capitalizing on OPEC’s efforts to cut production was the root of the tiff and would need to be addressed to assure long term price stability. Energy market expert and think tank advisor Cyril Widdershoven, on the other hand, urged the US to stay out of the matter.
• The independent, Dutch-based Moscow Times featured an op-ed by Andrey Movchan, senior associate and director of the Economic Policy Program at the Carnegie Moscow Center, who argued that the oil war could end badly for Russia: “It’s possible that Russia will choose to fight until the bitter end. The Kremlin is accustomed to using force as a prelude to negotiations and typically refuses to make face-saving concessions.”
• In his op-ed for the Moscow Times, Chris Weafer, Macro-Advisor for the Berlin-based bne IntelliNews (formerly Business New Europe), cast his lots with Russia coming out on top. But Weafer also made a point to quash claims that the price war was a coordinated effort between Russia and OPEC to weaken the US oil industry: “Both Russia and the major OPEC producers have been openly annoyed with the refusal of the US producers to participate in past production cuts, and the fact that the US industry has been the major beneficiary of the price support mechanisms. It is a stretch to say that Moscow and Riyadh are in any sort of cooperation to try and reduce US oil production, [..b]ut if a price war results in some US casualties and a greater reluctance by investors and lenders to fund future US marginal production, then Moscow and OPEC will be relieved.”

 

CHINA
In response to a question about the sudden decrease in crude oil prices, Chinese Foreign Ministry Spokesperson Geng Shuang emphasized concerns about the stability of prices given the effects of COVID-19 on the economy: “China is a major energy importer and consumer. We hope the international energy market will remain stable. Faced with the COVID-19 epidemic, countries have various outlooks on the world economy. At this particular time, a stable global energy market is of special significance.”

• The government-directed China Daily featured highlights from interviews with China Institute of International Studies researcher Xia Yishan, Head of the China Institute for Studies in Energy Policy at Xiamen University Lin Boqiang, and associate research fellow at the Institute of International Relations at the Shanghai Academy of Social Sciences Sun Xia. The experts emphasized that the risks associated with uncertainty of the price war outweigh any potential benefits from lower crude prices.
• In an editorial, the independent South China Morning Post offered a similar warning: “Of course, falling oil prices need not be a bad thing for importing countries such as China and Japan as well as consumers. But what the markets crave is price stability. Unless the Russians and Saudis come to their senses, the world economy, already reeling from a health crisis with no end in sight, is in for an even wilder ride.”

 

INDIA
The press release on Indian Prime Minister Narendra Modi’s phone call with Saudi Arabian Crown Prince Mohammed bin Salman did not mention the oil price war as a topic the two leaders discussed. However, the Indian government hiked taxes on petroleum and diesel by 3 rupees per liter on March 13th, which offset any significant changes to the retail price of the goods despite the falling crude oil price. 

• Ahead of the implementation of the tax hikes, the liberal Indian Express argued that it might be necessary for the government to seize the opportunity of the lower crude prices to fill its coffers for the long slog through the coronavirus pandemic: “[W]hile lower oil prices could provide a boost to the flagging economy, it is likely to be offset by disruptions in economic activity due to the coronavirus. The government must carefully assess the situation, monitor the sectors that are likely to be affected the most by disruptions in supply, and craft the necessary policy response.”
• While the liberal Hindu agreed that there were benefits to the plunging crude price, it was wary of the potential fallout for the global markets if the price war continues: “While a fall in prices is good news for major consumers such as India and China which depend on imports for a major part of their oil needs, it may be bad news for the big oil companies and the smaller shale oil players who are highly leveraged. A collapse of these shale oil producers may set off defaults in the bond markets, setting off its own non-virtuous spiral starting with the US markets.”
• The pro-government Daily Pioneer was supportive of the government’s prudence, but urged that the taxes should be reduced once the crude oil prices inevitably increase: “[T]his excise duty hike must be a temporary step only as this can  start pinching customers when Saudi Arabia and Russia start playing nice with each other again. While taking advantage of the situation to raise some money in tough times is not a bad thing to do, this must just be a stopgap.”
• In an op-ed for the Hindustan Times, Executive director of the Energy Forum Shreerurpa Mitra argued that while the price war began as a tiff between OPEC and Russia, if it is not solved soon, the outcome will be out of their hands: “Crude prices will be determined by global factors, thus limiting Opec+’s power even if the alliance pulls through the present existential crisis.”

 

JAPAN
As Japan is in the thick of battling the coronavirus, the government and mainstream media outlets have been relatively quiet on the oil price war. 

• In an op-ed for business-oriented Nikkei Asia Review, founder of Singapore-based Vanda Insights Vandana Hari argued the price war could not come at a worse time, as lower oil prices are of little use to the economies of Asian countries paralyzed by coronavirus and may cause long-term economic drags by disrupting energy supply chains and plans for transitioning to renewable energy sources. More directly, other states are crippled in the gamble of whether or not Russia and OPEC will wage the price war for the long haul or will return to the negotiating table: “The two outcomes could produce vastly different results, a difference of $30 or more in crude prices. Governments in Asia, already grappling with the unknowns of the coronavirus, have been left clueless on the oil price levels to factor into their budgets.”  

RPI acknowledges support from the MacArthur Foundation and the Carnegie Corporation of New York for its activities.