Commentary: Plunging oil prices will have huge consequences

Commentary: Plunging oil prices will have huge consequences

Low prices are generally good for big consumers, such as China, and bad for big producers such as Saudi Arabia, or more lately the US, says Christian Downie.

Oil markets have been ravaged this year by a collapse in demand caused by the virus and the
Oil markets have been ravaged this year by a collapse in demand caused by the virus and the Saudi-Russian price war AFP/Mark Felix

CANBERRA: Oil made headlines around the world again today, with US oil prices falling below zero for the first time. So what does it mean?

Three perspectives can help to make sense of the headlines.

AN ECONOMIC PERSPECTIVE

First, from an economic perspective, it’s quite simple – the supply of oil has outstripped demand and prices have fallen accordingly. As COVID-19 has brought the global economy to a standstill, with planes sitting on runways and cars idle in the garage, demand for oil has plunged.

But it is not easy for oil producers to turn off the tap, so they need somewhere to store it until they can find a buyer.

READ: Commentary: Even with low prices, this is not the end of oil

The problem is there is very little storage left so producers are literally paying buyers to take it off their hands, hence the negative prices we witnessed today in the US.

But don’t expect to be paid the next time you fill up your car at the petrol station.

A SECURITY LENS

However, if we view oil from a security lens, the picture looks quite different. For many nations energy security has been defined in terms of access to reliable and affordable oil and gas.

So low prices are generally good for big consumers, such as China, and bad for big producers such as Saudi Arabia, or more lately the United States.

READ: Commentary: Saudi Arabia's new, radical oil strategy aims to keep prices low

Oil prices have ended New York trading in the negative for the first time ever
Oil prices have ended New York trading in the negative for the first time ever AFP/Loren ELLIOTT

Security scholars have argued that the US shale revolution – the technology breakthroughs that have allowed producers to access the vast onshore oil and gas reserves and turn the US into the largest producer in the world – will boost American power and transform energy politics in Europe, Asia, and the Middle East to America’s advantage.

However, sustained low oil prices threatens to send some US shale producers to the wall, which could hamper the US oil sector and limit the geopolitical leverage of the US in these regions – although Donald Trump is doing a pretty good job of that himself.

READ: Oil in the age of coronavirus: a US shale bust like no other

WHO GOVERNS OIL?

Finally, rather than focusing on markets as economists do, or energy security as security scholars do, we can also ask an entirely different question: Who is governing global oil markets?

This is an important one because it draws our attention to the various international organisations and multinational oil companies that also govern oil at the global level.

READ: OPEC+ or minus? Oil supply cut numbers puzzle markets

For example,  two weeks ago we saw the G20 – the informal forum of world leaders of which Australia is a member, and which coincidentally is hosted by Saudi Arabia this year – establish a short-term “Focus Group” on the issue, calling upon international energy organisations, such as the International Energy Agency, to help stabilise global oil markets.

Which organisations dominate this process, and how effective they prove to be, for example, in brokering agreements between producers and consumers could play a big role in determining the oil outlook over the coming months.

Predicting future oil prices is a mug’s game but one thing is for sure – the consequences of what is taking place are never as simple as one perspective would have you believe.

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Christian Downie is Australian Research Council DECRA Fellow at the School of Regulation and Global Governance, Australian National University. This commentary first appeared on the Lowy Institute's blog, The Interpreter.

Source: CNA/el

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