The On-going Oil War (2020)- Causes & Effects: Global demand for energy is an upward moving trend-line majorly due to the growing and developing economies. As per EIA (U.S. Energy Information Administration), there would be an almost 50% increase in the world’s energy usage by 2050, which will be led by growth in Asia. Crude Oil contributes the maximum in energy production worldwide.
Oil isn’t just an energy source but a highly valuable commodity of the global economy. It has always been the most sensitive and influencing element when it comes to global trades, deals, and even wars. But the question is why so, what gives oil such immense governing power? Let’s find out in this piece of article.
The Global Oil Market Explained Briefly
Energy is one of the major underlying factors, which is running the economic activities. Brent Crude Oil contributes the maximum to the world’s energy production and consumption. Additionally ‘Crude Oil’ is the world’s largest traded commodity. This gives the oil an immense power to rule the global economy.
USA, Saudi Arabia, and Russia are the top three oil producers respectively, hence top oil-exporting countries followed by other Organization of the Petroleum Exporting Countries (OPEC). On the other hand, the world’s major oil consumers are the USA, China, Japan, and India. Both, the top producers as well as consumers of crude oil hold the maximum influential power on the global oil markets due to their high market shares.
(Source- Baker Hughes)
Why is the Global Oil Market in Crisis?
A recent outbreak of the pandemic ‘Coronavirus’, which started in China, has not just emerged as a threat to human life but has also turned out to be the root cause of unhealthy and unstable global economy.
China happens to be the major source of the global supply chain. Being the epicenter of the virus outbreak, China’s economic activities slowed down which hampered the global demand and supply scenario. Furthermore, other infected countries like Italy, America, Japan, etc. are on a lockdown in order to contain the virus.
The demand for oil fell in the last few months due to contracting economic activities around the globe and especially in China, which is the largest oil importer, subsequently this led price drop of oil in the global market. But the falling prices of the commodity fell even steeply than estimated as Saudi Arabia and Russia, two largest oil producers locked horns with each other.
The Beginning of ‘Oil-War’ in 2020
‘OPEC+’ (OPEC countries & Russia) recently held a conference in Vienna to come up with a contingency plan on the falling oil demand and subsequently falling oil prices. As per the International Energy Agency, the demand for oil will fall by 90,000 barrels per day accounting for the recent outbreak of ‘Coronavirus’.
As a solution, OPEC suggested a production cut in oil in response to falling oil demand, and stabilize the subsequently falling oil prices. But OPEC’s failed effort to convince Russia on the same led to the ‘Oil-War’.
On Russia’s disagreement to cut the oil production, Saudi Arabia member country of OPEC announced to increase its oil production followed by cutting its export prices of oil by $11, making the price $34 per barrel. This move by Saudi Arabia hurt all the other oil-producing countries.
Why did Russia refuse to cut Oil production?
Russia’s refusal to cut oil production and stabilize the price is explained as its way to hurt the USA’s Shale Oil Industry, which is one of the largest oil producers. Lower price per barrel will impact the USA’s Shale Oil margins. The oil extracting cost for USA is high, hence falling oil prices would further impact the profits for US Shale Oil companies.
How is Oil-War impacting oil-producing countries?
A beaten oil price, which is down by almost 25% due to on-going ‘Oil-War’, has some major implications. Being the most highly traded commodity, tanking oil prices is going to impact the revenues of the oil-run economies heavily. It is too soon to analyze the measure of the impact but, since the world’s economy is highly correlated to oil-prices and its demand, we can only imagine the impact if it gets worse.
What will be the impact on oil-importing countries?
While it only seems logical to say that tanking oil price is an opportunity of biggest oil importers like China, India, etc. but it isn’t that simple.
China, which is the largest oil importer and accounted for more than 80% of global oil demand growth in 2019, has already cut its oil demand 20% in February 2020 due to ‘Coronavirus’ impact. As a chain event similar fall in demand is seen worldwide. (Source- IEA, Business Insider)
Tanking oil price seems attractive to oil-importing countries, as it contributes to huge savings. But the scenario is a little different. Buying cheaper is profitable but with less demand, the benefit will not be passed over to a great extent.
Also read: Coronavirus- How it Infected Stock Market & Indian Economy!
On-going Oil-War, will it continue for long?
The current scenario of the global oil market is dicey and uncertain. The extent of domination that oil has on the economies worldwide only points towards one direction that longer the war continues higher will be the impact.
Saudi Arabia and Russia both are oil-driven economies and hence affording a tanking oil-price for a longer duration will only hurt their economies in the long run.
On the other hand, USA’s influence on the global output of oil is not nothing. It is the largest oil-producing country, thus it can also influence majorly. However Trump hasn’t announced any move to secure USA from the current oil-war scenario, but that doesn’t make America vulnerable. If the oil-war continues sooner or later we might witness a power play by America.
It is evident from history that geopolitical tensions like the ‘US-China Trade War’, have only resulted in damages. However, where few suffer some others might take advantage. Only time will tell what turn will this ‘Oil-War’ take.
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If we compare the returns on Nifty in 2018 with that of last year (2017- when it gave a return of around 28.6%), we can easily notice that the index has comparatively underperformed in 2018. Nonetheless, ups and downs are the characteristics of the market and the stock market investors should be not be haunted by it.
