KT Edit: Oil war triggered by Russia is doing more harm to the global economy
Published: Mon 9 Mar 2020, 10:39 PM
Last updated: Tue 10 Mar 2020, 12:40 AM
In times of crisis, more cooperation is what the world needs, not less. With the coronavirus straining health systems, hurting economic activity, curbing travel, and throwing life out of gear, an oil shock is not what we need, an oil glut to be precise, as markets go into a tailspin. Major oil producing countries failed to reach an agreement on Friday to cut production by 1.5 million barrels per day. Saudi Arabia that leads Opec had called for the cuts in the midst of the crisis. Russia didn't see wisdom in the proposal, an unwise thing to do, and we have a global churn across the oil, stocks, and health sectors. An opportunity to stabilise markets has been lost with this decision and immediate blame lies at Moscow's doorstep. Pointing fingers in the middle of a crisis, however, is intended for course correction and prevent the situation from going downhill. Business sentiment is at rock bottom as oil plunges to new depths as Opec and Russia initiate a price war. Cutting output as demand falls would have shored up prices, the logical thing to do. Throwing logic out the window as a tactic to gain market share would further damage the world economy lurching from one crisis to another.
The oil price war will certainly impact US shale producers, also struggling to grab a share of the pie. This is not the time for competition over a resource. What oil needs is subtle and sincere cooperation among producers to boost confidence. Burning bridges now will have long-term repercussions that countries cannot afford when they face multiple challenges. Demand for oil has slumped across the world, particularly from Asia. China is reeling from a health crisis that is crushing its economy. Other major importers such as Japan, South Korea, and India are fending off Covid-19. Containment is the buzzword. Confidence is at an ebb. This is a crisis that affects us all and there is no room for nationalistic or business sentiment. The international mood is grim as cases rise.
Russia is eyeing this opening with glee in its bid to make inroads into US shale markets.
It smells an opportunity which is causing bad blood with Opec, its ally. Moscow's plan is to knock off 1.5mbpd off US shale suppliers who were getting a foothold in the market.
This glut, and cheap oil will benefit importers who are currently busy with a health crisis. An oil crisis presents a perfect storm and there are fears of a recession, which global economic pundits are busy interpreting as a mere downturn, a blip in the radar.
Recession, downturn or not, plummeting oil prices, and rising coronavirus cases are a recipe for disaster. Markets, meanwhile, are tanking but have we reached the bottom of the oil barrel? Perhaps not, if Russia can be convinced to be more open about the benefits of an oil production cut. Currently, the world needs less oil and more solutions to the coronavirus crisis. It faces a crisis of confidence with health systems bracing for the worst from Covid-19. Countries are called upon to preserve the economic health of the international order. Freezing oil production till this crisis is over is a sound economic decision. It has been tried before and, more importantly, it has worked and stabilised oil markets. Is the Kremlin listening?