The End of the Oil Price War: Resilience in the Face of Crises

In recent times, the oil market has experienced significant volatility, culminating in an unprecedented price war between Saudi Arabia and Russia. However, as the dust settles, the question remains: who emerged as the winner in this geopolitical battle?

Understanding the Context: Big Oil and the 2020 Pandemic

The global oil industry has long been a deeply leveraged and cyclical sector, making it susceptible to various economic shocks. The 2020 pandemic exposed the fragility of the industry, leading to a dramatic decline in demand and a fiscal crisis. Even with the unprecedented $100 billion bailout from the US Treasury under Mnuchin and Donald Trump, primarily benefitting large oil companies, over 500 oil-related firms have declared bankruptcy since 2015.

Global Oil Markets: A Lesson from the 1970s

Historically, the oil market has faced similar crises, most notably in the 1970s during the oil embargo crisis. Despite these events, the world failed to make significant strides in reducing its reliance on oil. The current pandemic provides a fresh opportunity to shift away from oil, but it remains to be seen whether this time will be any different.

The Pandemic Crisis: Current State and Projections

The pandemic's impact on the global economy has hit bottom, and now focus is shifting towards market recovery. The International Energy Agency recently reported that demand for oil is now stabilizing, although global demand remains lower than pre-pandemic levels. The recovery is expected to be gradual, as countries ease lockdown measures and global demand returns to pre-COVID-19 levels.

Oil Prices on the Rise: The Aftermath of the Price War

The price war between Saudi Arabia and Russia officially ended when these two key producers agreed to cut production by approximately 10 million barrels per day (approximately 10% of normal global consumption). This agreement came into effect in late 2020 and led to an immediate rebound in oil prices. Despite initial fears of a prolonged downturn, traders now believe that oil prices will stabilize around $30 per barrel by mid-2021, with a potential for prices to rise to between $70 and $80 per barrel by the end of the year.

Global Geopolitical Dynamics: Russia, Saudi Arabia, and US Shale Oil

Both Russia and Saudi Arabia can produce oil at a significantly lower cost than US shale producers. According to industry analysts, Russia has a break-even point around $24 per barrel, while Saudi Arabia's is around $12 per barrel. In contrast, US shale oil producers need a price of anywhere between $40 and $60 per barrel to become profitable. This disparity means that as oil prices stabilize, Russia and Saudi Arabia could maintain profitable operations, putting pressure on US oil production.

The Role of Military Interventions

The United States has historically played a significant role in shaping global oil markets through military interventions and economic sanctions. Countries like Iraq, Iran, Syria, Libya, and Venezuela have seen their oil production drastically reduced as a result of US military actions or sanctions. By limiting the availability of oil from other sources, the US has effectively controlled global oil prices, often to its advantage.

A Future of Reduced US Oil Production

As oil prices stabilize, it is important to consider how this will impact US oil production. Given the higher break-even points for US shale producers, any sustained level of $30 per barrel could potentially force the US to cut production. This scenario could result in a significant shift in global oil dynamics, with the US relying more on OPEC countries for oil supply.

Conclusion

The current situation in the global oil markets highlights the complex interplay between political, economic, and environmental factors. While the price war between Russia and Saudi Arabia has seemingly ended, the long-term implications for US oil production remain uncertain. As the market continues to recover, it is crucial for all stakeholders to consider the lessons learned from previous crises and work towards a more sustainable and diversified energy future.