Question

Discuss how the low oil price might affect the major oil supplying countries. (Base on your knowledge on Cartel and take Russia and OPEC as an example)

Answer 1

The United States, Saudi Arabia and Russia are the world's top three oil producing nations. In order to control the oil prices in the world maket, an international body consisiting of 14 of the major oil producing nations was formed called Organisation of Petroleum Exporting Countries (OPEC).

• Even though OPEC controls over 70% of the world's oil reserves, recently, it's ability to regulate the supply has been limited in the wake of relatively new oil supply chains such as the United States.
• Normally, when the OPEC is concerned about the health of oil supply industry, it may either cut or boost the oil production, thus regulating the prices.As per the demand-supply curve, a cut in the production increases the cost while extra production may lead to fall in prices.
• Recently, the oil industries across the globe have been hit by various political reasons and attacks as the oil industry depends upon the global policy changes. The sanctions on Iran, bombings on Saudi oil fields, pipeline contamination in Russia are some examples.
• As almost all affected countries are going through a lock-down phase to curb the social transmission of the disease, the usage of automobiles have come to a significant fall, many industries have closed down and the people are sitting in their homes, fighting.
• This economic slowdown has caused the worst fall in oil demand since the crisis of 2008. And hence during the recent meeting of the OPEC, Saudi Arabia has pushed for a steep cut in production of oil in order to boost the oil prices. Russia is the main opposer of that decision which has someting to do with their political anger against the US.
• The US,which is the largest producer of oil since 2013, from its shale oil reserves has been growing the industry relatively slowly due to the fact that shale oil production is less profitable than the conventional way. And because of that fact, as the global slowdown started, many oil producing firms in the US haf filed for bankruptcy. A further weakening of the oil prices will reduce their competebility as they will be forced to cut down their production.
• The Saudi Arabia, which is the second largest producer has cut down the supply and prices of the oil upto $6-8 per barrel followed by a breakup in dialogue with Russia in the OPEC meeting held in March, 2020. Even though Saudi Arabia has pretty good reserves in the foreign exchange, a further reduction in supply and prices could lead to draining of its reserves and country losing credibility as a leader in OPEC.
• Russia who declined for a proposed plan to cut the oil supply as per Saudi Arabia's proposal has been retaliating against the America's action of putting sanctions on a Russian oil producing company. If the oil supply had been cut down, the oil prices surge and that will help the ailing US oil industry and that is what Russia don't need to happen. But finally, they succumbed to pressureand cut down it's oil supply causing to boost the oil prices across the globe to somewhere above $30 per barrel.
• Since the economic slowdown caused by COVID-19 is not going to end soon, the oil industies across the globe will be in pressure, particularly the US where the cost of oil production is much more compared to other nations which makes the business less profitable there.
• The OPEC, of which United States is not a part, has been failed to work as a promising dialogue to regulate the oil prices effectively. The Russia's exit from the Vienna dialogue in March is an evidence.
• Also, only a few OPEC member countries are willing to cut down th eproduction such as Saudi, UAE and Kuwait. Qatar, who was a part of the cartel had left an year back. This is because of the thought that member countries are not willing to cut down the production as it affects their revenue part. And because of that, they are willing to supply the oil at low prices. This has been evident in the case of Middle-East countries where oil production is the major revenue source.
• Since, the demand side of the market is less, the producers will be forced to reduce the prices to sustain and this will probably worsens the case. Saudi Arabia had already increased the debt ceiling to 50% of the GDP. The Russian currency has dropped by 30% along with Saudi Riyal facing the risk of devaluation which could impact investor confidences. And some of the bankrupted American shell oil companies faces the risk of shutting down.

So, there is a bit of unpredictable factor present in this economic slowdown caused by COVID-19 and only a demand surge can solve this problem. And a demand boost for petroleum can only be caused by lifting of lock downs which resumes the industries and automobiles, which in turn requires the end of the disease outbreak.