This week began with a bang for the oil markets. On Sunday the members of OPEC+ struck a historic deal to slash production by a whopping 9.7 million barrels in May and June in an attempt to rescue oil prices from the depths of the current oil price crash.
Last month global oil prices fell more in one day last month than they had in nearly 30 years thanks to the culmination of a series of unfortunate events spurred by the spread of the novel coronavirus. As COVID-19 shut down economies around the globe, oil demand plummeted and tensions rose between the OPEC+ members of Saudi Arabia and Russia, leading to an all-out oil price war and severe crude glut on the international market. Oil prices, not too impressive this year, to begin with, have dropped by more than 65 percent from this year’s highest prices.
This week’s OPEC+ curbing measures have created waves across the industry. Major players in the United States shale sector, which has seen financial devastation, bankruptcies, and tens of thousands of workers fired or furloughed in the wake of the oil crash, are currently clashing on how to respond to OPEC and its allies’ decision. Some producers think that the United States should follow suit and cut production in an attempt to boost global oil prices, with Diamondback Energy Inc. going to far as to proclaim that they would be willing to cut their production to zero for the sake of restoring oil prices, while “opponents of quotas insinuated that some drillers are supporting such restrictions for selfish reasons such as voiding contractual obligations.”
“In oil-producing regions in the United States,” Forbes reported earlier this week, “there is a sinking sense of dread for oil workers and firms alike as jobs evaporate and businesses fall over the cusp into insolvency. This is the harsh nature of the market-driven boom and bust of the oil business in the free market.” But of course the impact of the oil price crash and the OPEC+ deal has major implications for the entire global economy, not just the United States, and for some government regimes, the stakes are much, much higher.
“Across the globe, these events are bringing restless nights to autocrats and could destabilize political systems,” continues the Forbes article headlined “What Will Oil Autocrats Do Now To Keep Power?” Energy, and oil, in particular, form a huge fraction of the United States’ economy, but for some countries, it is the primary, and in some cases nearly only, a form of national income. “Economies centered on energy and governments that lack diversified streams of revenue are particularly susceptible to the tumult in this situation, says Forbes. “In democratic systems, political unrest can lead to transitions via elections, which are normal occurrences. However, in autocracies and in governments that are democracies in name only, economic turmoil from plunging energy revenue can be more disruptive and can lead to political crackdowns and even revolutions.”
This puts certain petro-nations and certain leaders into a very precarious position as global oil prices continue to wallow around in the depths. So far, it doesn’t seem that the weekend’s big oil production slash has done much to revive oil markets, and oil autocrats around the world must be sweating. The biggest examples of this petro-pickle are, of course, Russia and Saudi Arabia. “Since transparency is generally lacking,” from Riyadh and Moscow as well as many other autocratic regimes, “exact and verifiable financial data is often missing. However, in place we can refer to how the CIA describes their reliance on a strong oil market.”
And the CIA states in no uncertain terms that Saudi Arabia and Russia, the second and third largest oil producers in the world, respectively, are severely dependent on global oil markets to maintain their Gross Domestic Products. The irony that these are precisely the two countries who spurred the current global crude glut and oil price crash is not lost on anyone who is paying attention.
While these two nations are some of the biggest fish in the oil-producing world, there are other, much smaller economies that are even more dependent on oil, including Kuwait and Azerbaijan. Though these countries and these regimes have survived oil price shocks in the past, this time could be different, as this weekend’s seemingly failed attempt to revive the global oil economy has shown.
“For a strong-man or an autocrat whose country relies on oil sales,” writes Forbes, “the question must be, ‘How desperate am I?’ What are they willing to do to hold on to power? And for the oil industry and oil traders, the question is will any of those authoritarian calculations mean drastic steps that might prop up prices?”
Desperate times call for desperate measures, and the eyes of the world will be on the petro-nations of the world in the coming weeks to see just what measures are in store. In a year that has shown us that nothing can be taken for granted, it’s tempting to just fall back on a time-honored idiom: when it comes to oil producers’ decisions this Spring and Summer, expect the unexpected.