Implications of the Oil War - Pakistan Today

Implications of the Oil War

  • The differing Saudi and Russian approaches to the epidemic have created it

By: Fareha Iqtidar

The international oil market witnessed its gravest fall in prices since 1991, during the first third of this month. The oil price crash startled the global market which was apprehensive of the influence of the coronavirus pandemic on world economy. Such a drastic dip in a single day; occurred three decades back, when US forces undertook an air attack on Iraqi forces subsequent to their foray into Kuwait.

The recent crash was set off by the Kingdom of Saudi Arabia as it steeply slashed the oil prices. The act was in retaliation to Russia. On 6 March, during a meeting in Vienna between the Organization of Oil Producing Countries (OPEC) and Russia, the biggest oil exporter outside it, the festering inconsistencies between their outlooks on oil prices finally came out into the open. Saudi Arabia asked the Russian representatives to reduce their oil supply so that the prices of oil in the international market could remain higher during the coronavirus pandemic. As for Moscow, it had participated in Vienna meeting inclined to curtail the growth of US shale production. Despite the willingness to find a middle ground, Moscow was not ready to make such steep and prolonged production cuts that Riyadh demanded. Therefore, Russia declined to put a restriction on the volume of oil it had been producing.  As the Saudi-Russian talks in Vienna came to an end, rather than any agreement, the two states had turned against each other in terms of oil production and sale. Saudi Arabia has thus started an oil price war between OPEC, Russia and the USA. Russia has turned weary of the policy of reducing its oil supply in order to ensure stability of oil prices; and was now of the view that such a strategy provides greater growth opportunity to the US shale firms.

The plunge has been exacerbated by the dwindling demand of oil caused by the global spread of the novel coronavirus. The pandemic ignited a succession of cuts in oil prices. The contagion has negatively affected the energy requirements across the world, primarily in China that is the largest importer of crude oil. However the virus that was first reported in China has now been declared a pandemic, causing a cancellation of the majority of international flights and shutting down of industrial units. Assets and markets throughout the world have been adversely affected by the price slash.

For Pakistan, the decrease in oil prices will be beneficial for the state as the imports of the country are oil-based. The current oil price cuts will reduce the oil import bill of the country. The oil and gas exploration and production sectors, on the other hand, would be poorly hit by the lowered prices. In addition, it is not expected that the consumers in Pakistan would get to benefit directly from the lower oil prices in the international market

The current oil war appears to be one with no clear winner. All parties will face monetary loss irrespective of the buyers they may retain. However, they have been gauging their success in the energy market on the basis of greater sales and market share irrespective of the sale price. With the continued tanking of oil prices, and the fast spreading pandemic, US oil firms are declaring budget cuts. Shale oil had brought with it an economic boon and lower oil prices will be detrimental to the US oil companies. Although US oil firms got caught in the middle, the USA still continues to be the largest oil producer in the world. However, following the current trajectory, Saudi Arabia is expected to take second spot. In the case of the OPEC states, their production cost is the minimum. On the other hand, as they have high consumption rates and offer subsidized prices for their populations, OPEC states are required to maintain a relatively higher price, around $70 per barrel, to avoid a deficit. Moscow maintains it is well-shielded from the Saudi price cut as its budget is set up on a rather low price of oil. However, it is expected to depreciate a little from its place in the energy market. The party to bear the greatest burnt will be the oil-dependent countries. It is foreseen that the tussle might culminate only when Saudi Arabia will successfully resume its position as the oil market leader.

For Pakistan, the decrease in oil prices will be beneficial for the state as the imports of the country are oil-based. The current oil price cuts will reduce the oil import bill of the country. The oil and gas exploration and production sectors, on the other hand, would be poorly hit by the lowered prices. In addition, it is not expected that the consumers in Pakistan would get to benefit directly from the lower oil prices in the international market.



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