The Oil Price Crash and International Petro-Politics

The global oil market has entered uncharted territory. On
Monday, the price of WTI crude, the US oil benchmark, went negative for the
first time in history, closing at -$37 per barrel .
What happened? And what does it mean for international petroleum politics? Two factors drove the oil price collapse: market
fundamentals and the quirks of oil futures trading. Market fundamentals—oil supply and demand—were the proximate
cause of the price collapse. Since the COVID-19 pandemic began earlier this
year, global oil demand has dropped by twenty to thirty percent. In the United
States, consumption of petroleum productions has fallen thirty-one
percent since January. However, oil supplies have yet to decline. Although OPEC+
members decided earlier this month to cut
their oil output by 9.7 million barrels per day, the agreement does not go
into effect until May 1. In the meantime, many countries have been pumping at
record levels, in response to the price war Saudi Arabia and Russia launched in
March. With demand collapsing, there is nowhere for a lot of this
oil to go. Refineries aren’t buying and storage facilities are rapidly filling.
In Cushing, Oklahoma, the delivery point for WTI crude, all storage capacity is
either physically full
or reserved . That brings us to the immediate cause of Monday’s price
collapse: the vagaries of the oil futures market. Oil traders buy and sell
contracts for future deliveries of oil. These contracts are usually for
delivery the next month. So, in April, traders are buying and selling for
delivery in May. As the end of each month approaches, traders with contracts
to buy resources have two choices. They can “take delivery” of the oil
resources they’ve contracted. Or, they can “roll over” their contracts by selling
the current ones and buying new ones, for the next month. Most traders don’t
want to take delivery. They buy and sell futures to make money, not to obtain
oil resources. So, they try to sell their contracts before each month’s expiry
date. The May WTI futures contract was set to expire this Tuesday.
On Monday, traders that still held contracts to buy in May, but didn’t want to
take delivery, were trying to sell. To their extreme chagrin, there were no
buyers. And storage at Cushing—the delivery point—was full, so they couldn’t
offload their oil locally. Traders panicked and prices cratered. Once they
dropped below zero, traders were literally paying buyers to take oil off their
hands.  Initially, analysts
hoped that the price crash was a blip, limited to May contracts for WTI. On
Monday, as the May contract careened into the negative zone, the June contract
for WTI remained fairly stable. So did the June contract for Brent crude,
another global oil benchmark. However, on Tuesday, the June
contracts for Brent and WTI started to sag. They haven’t approached
negative territory. But they’re both below $25 per barrel: prices we haven’t
seen since the 1998–99 Asian financial crisis. This slump suggests that low oil
prices are here to stay, until the COVID-19 pandemic eases and global oil
demand revives. For international petroleum politics, the consequences of
the oil price collapse fall into three categories: the theoretically good, the unambiguously
bad, and the uncertain. The theoretically good news is that, for oil-importing
countries, low oil prices usually boost economic growth. They reduce the costs
of agriculture, manufacturing, and transportation, which lowers consumers’
costs and stimulates domestic spending. However, in the midst of a pandemic,
consumers can’t take advantage of low oil prices. In the United States, transportation
and manufacturing have ground to a halt, while mass unemployment is
discouraging consumer spending. As a result, low oil prices’ positive effects for
the United states will be limited. In contrast, countries that emerge from the
pandemic while prices are low, like China, could benefit. The unambiguously bad news is that the oil price collapse is
hitting oil producers hard. This includes US shale oil companies. Their stock
values were already falling, by the end of January. When the oil price war
began in March, some companies’ stock values dropped another forty
percent in one day. One prominent company, Whiting Petroleum, has already
gone bankrupt .
More are expected to follow. The US oil regions, including east Texas and North
Dakota, are experiencing mass layoffs. Oil-producing countries are also suffering .
With oil prices under $25 per barrel, only a few countries, like Saudi Arabia,
can profitably extract oil resources. No oil-producing countries can balance
their budgets at that price. Russia needs $42 per barrel to balance its budget,
Saudi Arabia needs $84, and Iran needs $195. States that are heavily dependent
on oil revenue and lack substantial financial reserves will need to
dramatically cut their spending or borrow heavily to maintain their fiscal
balances. Both of these strategies could produce or aggravate social
instability. The ambiguous news concerns international conflict. One apparent
upside of the oil price collapse is that it definitively eliminates the threat
of international “oil wars.” In a world awash with petroleum resources, why
would states fight over them? And if countries stop trying to grab each other’s
oil resources, surely we’ll see a reduction in interstate conflict. The international conflicts that we commonly attribute to
countries’ petroleum ambitious, including World War II, Iraq’s invasion of
Kuwait, the Iran–Iraq War, and the Chaco War between Bolivia and Paraguay, were
actually fought for other reasons. Governments launched these conflicts because
of aspirations to regional hegemony, domestic politics, perceived international
threats, and national pride, not because they wanted to seize other countries’
oil. Most of the smaller-scale conflicts that occurred in oil-rich areas over
the last century were also instigated for non-oil reasons. Eliminating
international oil wars won’t reduce the frequency of international conflicts,
because we didn’t have international oil wars to begin with. However, low oil prices could affect the frequency of
international conflict in two other ways. First, low oil prices could make oil-producing countries
less aggressive. As their resource revenue falls, oil producers may decide that
they can’t afford international aggression. Cullen Hendrix has found that, when
oil prices are low, producers initiate fewer
international conflicts . During the current oil price collapse, Saudi
Arabia has already declared a ceasefire
in its war in Yemen. Russia could also decide to decrease its foreign policy
entanglements, especially in more distant locales, like Syria. If the Saudis
and Russians both retrench, their relations could become more harmonious: a
startling epilogue to the recent price war. Meanwhile, all oil producers will
think twice before embroiling themselves in costly new international conflicts. The second dynamic pushes in the opposite direction. Low oil
prices could make some oil-producing countries more aggressive. Falling
resource revenue will cause or exacerbate economic crises in many oil-producing
states. To divert popular attention from these crises and generate
rally-round-the-flag effects, beleaguered state leaders may decide to attack
their neighbors. Venezuelan President Nicolas Maduro employed
this strategy after oil prices dropped in 2014–15, reasserting his state’s
claims to Guyanese territory as Venezuela’s economic crisis deepened. Other oil producers with easily accessible rivals could do
the same. Iran could again attack
Saudi Arabia, the Saudis could intensify their feud with Qatar ,
Azerbaijan could target Armenia, Nigeria could reactivate its territorial
dispute with Cameroon, Algeria could pick a fight with Morocco, Equatorial
Guinea and Gabon could reenergize their disagreement over contested islands, or
Russia could attack any number of its neighbors. Budgetary constraints should limit the scope of oil
producers’ international aggression. However, as economic crises intensify, the
potential for larger domestic or international ruptures will increase. And
then, the oil price collapse could get ugly.

2020-04-24 | Environment/Energy, Security | English |