EnergyInsights.net: Oil price news, oil and gas analysis, energy supply & demand, oil technology, gas and oil reserves, alternative energy

EnergyInsights.net: Oil price news, oil and gas analysis, energy supply & demand, oil technology

Energy Insights: Energy News: The oil price war harms chances of international cooperation in a crisis

 Energy News

old news articles

The oil price war harms chances of international cooperation in a crisis


22-03-2020

The oil price war harms chances of international cooperation in a crisis

Saudi Arabia and Russia are collaborating in a beggar-thy-neighbour battle for share of the market


il has a nasty habit of featuring in global recessions. At the start of 1973 the global economy was celebrating a quarter of a century of strong growth. By the end of the year the golden age had come to a shuddering halt after a cartel of oil producing nations – Opec – drove up the cost of crude in response to western support for Israel in the Yom Kippur war.

A spike in oil prices has been a feature of every subsequent global downturn – until this one. This time what’s been notable about the cost of crude is that it has been coming down fast, hitting levels last week not seen since the aftermath of the invasion of Iraq in 2003.

On this occasion, the oil price is a symptom rather than the cause of the problem. The first rule of economics is that the price of something is determined by the interplay of supply and demand, and what’s currently happening is that two of the world’s biggest producers – Saudi Arabia and Russia – are pumping as much crude as they can at a time when demand for the commodity is going through the floor.


This is costly for both countries, especially Saudi Arabia, which will have to make sizeable budget cuts to compensate for the loss of oil revenue. But both Moscow and Riyadh think the short-term pain is worth it to capture a bigger share of the market. Their target is the US shale sector, which has grown rapidly but is heavily indebted and requires global oil prices to be much higher than their current levels to be financially viable.

Geopolitics as much as economics has been behind the price war. Russia is not only worried about competition from US oil exports, it is upset about the sanctions imposed by Washington on its national oil company, Rosneft, over its trade with Venezuela.

In theory, falling oil prices should be good for growth. Business costs fall when fuel becomes cheaper and consumers see their wages go further. But these are not normal times. A falling oil price at the start of the US driving season would normally encourage even more Americans to take to their cars and SUVs. But the Covid-19 pandemic means there is unlikely to be much of a driving season this year.

Similarly, it might now be £10 cheaper for UK consumers to fill up their tanks than it was a month ago but they are not going to spend the windfall on a visit to the pub or cafe, because they are all closed.

At the end of last week, the oil price registered a gain after Donald Trump announced that he would support US producers by adding to America’s strategic reserve. But with the global economy facing falls in output not seen even in the Great Depression, the risks to the oil price remain strongly to the downside.

Opec is no longer the force it once was, and the attempt to include Russia as a sort of associate member has ended in failure. The fact that Saudi Arabia is the current chair of the G20 group of developed and developing nations only serves to highlight the weakness of international co-operation at a time when it has never been more sorely needed.

From Riyadh’s perspective, opening the taps makes sense because it believes it can win a race to the bottom. Without Russia’s cooperation, production curbs were not going to work anyway, and Saudi oil is plentiful and cheap to get out of the ground.

Vladimir Putin’s approach has echoes of the cold war, both in its economic show of strength to the US and its implicit warning to the Saudis that they need to increase their purchases of Russian military hardware.
But it is also worryingly redolent of the 1930s when the US imposition of the Smoot-Hawley tariff triggered tit-for-tat protectionist measures. Beggar-my-neighbour policies are back.

Supermarkets are living up to their mission statements

In the pre-coronavirus era – in other words, just a few weeks ago – the corporate fashion was for companies to declare their “purpose”. About 90% of these ponderous statements looked like the work of the PR department, so a minor consolation of the current crisis is that we’re discovering which companies can actually summon a spirit of genuine resolve and endeavour. Near the top of the list would be the supermarkets.

Their on-the-hoof exercise in adapting logistics networks has been impressive. A small army of temporary workers is being hired to fill shelves and drive vans. One Tesco store manager said new recruits could complete the administration process, be trained and be “fired up and ready to go” within four hours. Meanwhile, Asda has been linking up with stricken hospitality and travel companies to take on staff. Others are hiring through “friend and family” initiatives.

The tone from the top of these organisations has also been spot-on. In normal times, Morrisons chief executive David Potts would invite guffaws if he said the company was “at the service of the nation”. Now it sounds credible, especially when combined with a policy of paying small suppliers immediately to ease the strain on their cashflows.

Not everything has run perfectly, of course. Websites have creaked with the extra online demand; not all vulnerable shoppers have got what they wanted in dedicated shopping hours; and restrictions on would-be hoarders should probably have been introduced sooner.

In the round, though, one must applaud. By way of mental experiment, ask yourself whether you’d rather have government ministers in charge of food distribution at a moment of maximum stress on the system. When the crisis passes, let us hope bosses remember to award their staff some fat bonuses.
Closing time for Wetherspoons’ resident medical expert

‘Am I out of my depth?,” asks Tim Martin, chairman of the pub group JD Wetherspoon, to which the only possible answer is: yes, you are, old fruit.

Martin, uniquely among the bosses of FTSE 350 companies, is under the impression that he is obliged to broadcast his views on the best way for the government to tackle what he calls “the current health scare”, and – surprise, surprise – he would prefer an approach in which the population remains free to frequent hostelries such as his.

“I’m obviously not an expert but I’ve got a view and that’s all I can say,” he said, just before he served up another round of non-expert analysis on Friday: “More people have caught the virus in one building, parliament, than in all our pubs combined.”

Martin, unfortunately, did not provide a source for this statistic, but he had wanted to keep open Wetherspoons’ 867 pubs in the United Kingdom. Matters were taken out of his hands on the same day he spoke, of course.
Naturally, one hopes that Wetherspoons survives and then prospers once actual epidemiologists have assessed the “scare” as less scary. The business is successful, has many loyal customers and serves a decent pint at a fair price. ’Spoons is a great institution.

Martin himself also enlivens the corporate scene on matters where his opinions carry more weight. A recent rant about the perils of box-ticking wonks and their one-size-fits-all approach to boardroom governance was widely applauded, even by one important fund management body.

On that occasion, Martin could speak from long professional experience and provide oodles of evidence to support his argument.

There are, though, subjects where he would be well-advised to put a sock in it. A national health emergency is one.

www.theguardian.com

Printer Friendly version...

Site Map | Privacy Policy | Terms & Conditions | Contact Us | ©2004 EnergyInsights.net