This week started with an explosion in the oil markets. OPEC + members made a historic deal on Sunday to cut production by 9.7 million barrels in May and June to save oil prices from the depths of the current crash.
Last month, world oil prices fell more in a day last month than they had in almost 30 years, the culmination of a series of unfortunate events fueled by the spread of the new coronavirus. As COVID-19 shut down economies around the world, demand for oil fell and tensions increased between OPEC + members from Saudi Arabia and Russia, resulting in a total oil price war and serious overabundance of crude on the international market. Oil prices, not too impressive this year, to begin with, fell more than 65% from the highest prices this year.
This week’s OPEC + reduction measures have created waves in the industry. The main players in the American shale sector, which has suffered financial havoc, bankruptcies and tens of thousands of workers made redundant or on leave following the oil crash, are currently confrontation how to react to the decision of OPEC and its allies. Some producers believe the United States should follow suit and cut production to drive up world oil prices, Diamondback Energy Inc. going as far as to proclaim that they would be willing to cut production to zero to restore oil . price, while “opponents of the quota implied that some drillers support such restrictions for selfish reasons such as the termination of contractual obligations”.
“In the oil producing regions of the United States”, Forbes reported At the start of the week, “There is a feeling of terror for oil workers and businesses as jobs evaporate and businesses fall into insolvency. This is the harsh nature of the boom and the collapse of the oil market in the free market. But of course, the impact of the oil crash and the OPEC + agreement has major implications for the global economy as a whole, not just for the United States, and for some government regimes, the stakes are high. , much higher.
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“Around the world, these events are causing restless nights for autocrats and could destabilize political systems,” said Forbes’ article, “What will oil autocrats do now to keep power?” Energy, and oil in particular, represents a huge fraction of the US economy, but for some countries it is the main, and in some cases almost only, a form of national income. “Energy-centric economies and governments that lack diversified sources of income are particularly sensitive to the tumult in this situation,” said Forbes. “In democratic systems, political unrest can lead to transitions through elections, which is normal. However, in autocracies and in governments that are just democracies, the economic turbulence linked to the fall in energy revenues can be more disruptive and lead to political repressions and even revolutions. “
This puts some petro-nations and some leaders in a very precarious position as world oil prices continue to wallow in the depths. So far, it does not appear that the big drop in oil production over the weekend has done much to revive the oil markets, and the oil autocrats around the world must sweat. The greatest examples of this pickle are of course Russia and Saudi Arabia. “As transparency is generally lacking”, in Riyadh and Moscow as well as many other autocratic regimes, “accurate and verifiable financial data are often lacking. However, we can refer to how the CIA describes its dependence on a solid oil market. “
And the CIA unequivocally states that Saudi Arabia and Russia, the world’s second and third largest oil producers, respectively, depend heavily on world oil markets to maintain their gross domestic product. The irony that it is precisely the two countries that have fueled the current global glut of crude and oil prices is not lost on anyone paying attention.
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Although these two nations are among the largest oil-producing fish in the world, there are other much smaller economies that depend even more on oil, notably Kuwait and Azerbaijan. Although these countries and regimes have survived oil price shocks in the past, this time could be different, as shown by the seemingly unsuccessful attempt to revive the world oil economy this weekend.
“For a strong man or an autocrat whose country depends on oil sales,” writes Forbes, “the question must be,” How desperate am I? What are they willing to do to maintain power? And for the oil industry and oil traders, the question is whether these authoritarian calculations will mean drastic measures that could support 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 what measures are in store. In a year that has shown us that nothing can be taken for granted, it is tempting to be content with an age-old idiom: regarding the decisions of oil producers this spring and summer, do you expect to the unexpected.
By Haley Zaremba for Oilprice.com
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