COVID-19 Outbreak and Its Impacts to Oil
Author: Adila Nurul Ilma
The shrinking demand for oil due to the Covid-19 outbreak caused oil prices to collapse, thus leading OPEC to organize a summit in Vienna on 5 March 2020 which resulted in an agreement by all 14 members to slash oil production by 1.5 million barrels per day (bpd) to support oil prices during the pandemic. OPEC demanded Russia, a member of OPEC+, to cut down on its oil production by another 300,000 bpd. Yet, on 6 March 2020, Russia balked and rejected the demand, thus putting an end to the Vienna deal between OPEC and non-OPEC countries, resulting in the fall of oil prices by 10%. In response to this, Saudi Arabia increased its oil output, effectively flooding global markets and pushing the global price for oil further down. Now, the world is witnessing an all-out price war between the two.
Saudi Arabia’s tit-for-tat decision appears to be made to assert its dominance in the global oil market and undermine the Russian and US shale industry – which is vulnerable to low oil prices – to preserve its leading position in the oil market. Likewise, it hurts countries that are heavily reliant on oil exports, especially in Africa, Southeast Asia, and South America. The price warfare is a losing game for everyone, especially Saudi Arabia that, at 65% of its budget, relies more heavily on oil revenues compared to Russia (37%), which has a more diversified economy. While Kremlin can last for many years with low oil prices, it is doubtful that Riyadh can sustain such condition for long. In times of great uncertainty, especially with the ongoing Covid-19 pandemic, stability should not be compromised. There is a pressing need for a restoration of dialogue between Russia and OPEC that can lead to a production deal, thus allowing the rebound of the oil market and restoring the much-needed stability.