Price war in the oil market in 2022: winners, losers and future actions (Russia Matters, USA)

the analytical critiques on the inability of OPEC+ to come to a new consensus regarding further production cuts during talks on March 6, 2022, dominated by two broad themes. The first topic is the analysis of the origins of differences between Saudi Arabia and Russia, which became the cause of their quarrel. The second topic is the analysis of the consequences, under this analysis, the winners in this situation experts are typically referred to as the consuming country, where the cost of oil decreased significantly. Meanwhile, much less attention is given to the third important topic, namely the possible ways to resolve the pricing conflict in the oil market.

while the first of these three topics in some detail already revealed, the rest wasn’t examined as much in detail and this article is intended to fill this gap. In the centre of this article will attempt to answer three key questions related to the second and third themes. First, whether China is the main winner in this price war? Second, what is the pain threshold the key participants in this war, in particular Russia and Saudi Arabia? Thirdly, you will play a market forces a decisive role to end the price war in the oil market?

China as the main winner

typically, the lower prices benefit countries that import oil and have a negative impact on countries that export oil. For example, in the period of falling oil prices in the years 2014-2016 China, the world’s largest importer of oil, annually saving approximately $ 2.1 billion for every dollar reduction in the price. So theoretically, if the world price of oil now averages $ 30 instead of $ 60, China will be able to save on oil imports ifapproximately $ 300 million, according to the forecasts of the energy information Administration of the United States and the Agency of Morgan Stanley in relation to the demand. In addition, it is assumed that the decline in oil prices stimulates consumer demand and economic growth. Thus, China apparently will be able to take advantage of lower oil prices to meet their very considerable demand for imported oil and to restart economic activity in the country. However, this optimistic picture should pay attention to some nuances.

first, the recovery of China’s economy depends on demand in other countries. For example, China is a key supplier of intermediate components to companies in the United States, Europe, Japan and South Korea. Approximately 20% of global trade is intermediate products for the production originates in China in 2002 this figure was only 4%. The current pause in the operation of production facilities in the United States and Europe and growth in China the number of imported cases of infection with coronavirus infection, negate the predicted benefits from falling global oil prices.

second, the decline in oil prices could adversely affect key sectors of the Chinese economy that do not depend on foreign clients. Chinese oil giants, suffering from falling incomes, can reduce spending on exploration and production of oil, which in turn becomes an obstacle to the implementation of government’s orders on improving energy security.

third, the slowdown of the Chinese economy preceded the epidemic of coronavirus infection. Before China can fully enjoy the favorable effects of lower oil prices, he must cope with a number of structural obstacles, including a decrease in the productivity of labor and capital, as well as the fragility of the financial sector. In any case, the experience of Asian economic “tigers” indicates that more moderate growth is likely for China to become the new norm.

Finally, the main and obvious winners in a price war in the oil market became most oil traders and tanker owners, rather than China. Based on the increasing price gap in the case of oil purchased now and delivered later, the oil traders have got huge oil reserves on land and in the sea for transactions that in the short term, will bring them huge profits. Tanker owners derive great benefits from soaring freight rates, which resulted from the mass of competing demands from oil traders and producers of the Persian Gulf, intending to flood the market with cheap oil. But even before the start of a price war tanker owners have already benefited from the lack of oil tankers, resulting from sanctions, which the United States has imposed against the subsidiaries of China Cosco.

Pain threshold and a margin of safety

Among the key manufacturers and exporters of oil, there is no winner. The question is, who is most vulnerable and who will give way first. Expert opinion regarding the pain threshold of the three main players — Russia, Saudi Arabia and the us shale industry — diverge.

on the one hand, the currency peg of Saudi Arabia to the us dollar makes it less flexible compared to the Russian ruble exchange rate is floating freely. The Russian budget is heavily dependent on oil exports, it gets an additional 70 billion rubles on the each ruble depreciation to the us dollar since the associated with oil production costs are mainly in roubles, while revenues from oil sales are received in dollars. Saudi Arabia sells its oil to Europe at a price of $ 25-28 per barrel, but it would be difficult to compete with Russian oil because Russia can boast of robust distribution networks, faster deliveries and a low cost of oil production. On the other hand, although the price of oil in 2022, an average of 35 dollars per barrel, the budget deficit in Saudi Arabia about 15% of GDP looks quite disappointing compared to almost zero, Russia’s budget deficit, greater foreign exchange reserves Saudi Arabia will help her to support the deficit spending for at least five years. In addition, Saudi Arabia has access to foreign financial markets in contrast have fallen under Russian sanctions, although in this case, China can step in and make a new proposal in the spirit of “credit in exchange for oil”. Ultimately, in terms of economic and financial buffers in Russia and Saudi Arabia are about equal, especially considering the fact that, as history shows, this oil war is unlikely to last more than two years.

the Contextthe Production of shale oil in Colorado, USATNI: can the US survive the oil war 2022?The National Interest26.03.2020 Polskie Radio: coronavirus only helps ПутинуPolskie Radio24.03.2020 Nettavisen: three reasons for the fall in oil prices is threatening to plunge the world into коллапсNettavisen23.03.2020

meanwhile, in the socio-politiEskom aspect of Russia, most likely, has a significant margin of safety. In modern Russia stability takes precedence over growth. The Russian elite understands that the systemic reforms needed to revive the economy, can piss off key players in Russia, resulting in the Kremlin’s control over Russian politics will weaken. Despite the fact that the people’s confidence in the President of Russia Vladimir Putin has significantly decreased, it most likely will remain in that position until the end of his life. The mentality of a fortress under siege, characteristic of Russian culture is likely to help Russia to survive the negative impact of falling oil prices. Meanwhile, the political situation of the crown Prince of Saudi Arabia Mohammed bin Salman looks less durable. Since the pandemic coronavirus infection has led to a sharp reduction in foreign investment and a decline in the tourism sector, which underpins its reform programme, the public Saudi Arabia might refuse to endure the consequences of the oil war. The more that it is about one-fifth of the citizens of Saudi Arabia bought shares of the national oil company, Saudi Aramco, the cost of which fell by 11% compared to the price in December 2019.

as for the American producers of shale oil, companies outside the Permian basin and has the largest debt, may simply not survive such a sharp decline in oil prices. Indeed, the average price of oil at $ 235 per barrel in 2022 may lead to loss of production of more than 3 million barrels per day compared to the level of 2019. However, shale oil has already demonstrated its efficiency and durability. In 2019 they increased production, despite a significant decrease in the number of wells. In the result, the average price nand shale oil, these companies will not incur losses, decreased from $ 68 per barrel in 2015 to $ 46 today. Some of them will even be able to benefit financially through the hedging mechanism. International oil giants, which accounted for a fifth of production in the Permian basin, is also likely to survive low prices, and then buy and hold financial recovery of the remaining mining companies.

How to end a price war in the oil market

the basis of a price war in the oil market in 2022 are simultaneous shocks from the demand and supply. This makes the situation very unusual, but not unprecedented. Key participants in this conflict are faced with each other before, in 1985, when Saudi Arabia’s decision to increase production five times led to the fall in oil prices to 10 dollars, which was an additional financial blow to the Soviet Union, which collapsed in 1991. The current situation is in the global scope and depth of the decline in demand amid expectations of a global recession in the next few months, the demand for oil could fall by 10 million barrels a day.

There are three possible ways to end this price war. The first is the recovery of demand in China, whose share in 2019 fell three-quarters of the growth in oil demand, one-quarter of global growth and almost one-fifth of global GDP. However, as noted earlier, to play the role of world locomotive China interferes with his role of intermediates in global supply chains, as well as its own structural weaknesses. Thus, a quick settlement on the basis of the recovery in demand is extremely unlikely.

Ustrannie oversupply of oil could be an ideal way to end a price war in the oil market. However, the producers of Persian Gulf countries and Russia have already announced their intentions to increase production to win back market share lost as the result of production cuts under OPEC agreements+. In the United States sale of recovered oil to replenish the strategic petroleum reserves U.S. Department of energy, would be akin to the reduction of production. However, the amount of purchase is only a week production. And the growth of global production will be too great to be rapidly neutralized.

All this makes the revision of the terms of the agreement OPEC+ most realistic way to end a price war. You may return the parties to the talks in Vienna will depend on the United Arab Emirates and Oman. Taking advantage of the Declaration on strategic partnership between Russia and the UAE, this Gulf state tried to reduce the distance between the policies of Russia and the Gulf countries regarding Syria and Libya. For example, in December, Saudi Arabia appealed to the UAE to convince Russia to agree on new production cuts. Oman may also take advantage of its role as a mediator in the region. Given that public debt already exceeds the size of its sovereign wealth Fund, Oman is in the weakest position and will not cope with a prolonged period of low oil prices.

the UAE and Oman can draw strength from the conciliatory signals coming from Russia and Saudi Arabia, which still left the opportunity for some sort of agreement in the format of OPEC+ in the future. Concessions on the part of the United States, which amounts to an easing of sanctions against Iran and Venezuela, under the pretext of neobodimasta easier difficulties against the backdrop of a pandemic that can bring a positive response in Russia. The promise of the United States to seriously consider the sale of much-needed F-35 to Saudi Arabia and the UAE could also serve as a stimulus for the conclusion of the transaction.

And while balancing on the brink, hurt pride and the demand will continue to fuel a price war in the oil market in 2022.

Li Chen SIM is an associate Professor in Zayed University in the United Arab Emirates, an expert on the energy economy in Russia and the middle East.

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