Since the outbreak of Covid-19 pandemic the world has faced crisis in almost every field of life. From medical to trade to sports, there is nothing which is not effected by this deadly virus directly or indirectly.
Almost all countries have imposed lockdown in order to counter this virus and to prevent their citizens from this deadly disease. As a result almost every business has shut down. Due to the current situation the oil prices has gone down as well. The oil prices in the past few weeks remain the lowest of the decades.
This is because the the demand of the oil due to the lockdown has come down quickly and as a result the pricrs as well. But this is not as simple as it looks. There’s apparently an oil war is going on between the giants of the field which further worsen the situation.
The intensified relations due to oil could prove very costly because the world should come closer in this difficult time to establish a mutual mechanism against Covid-19 outbreak.
The oil crisis starts when the pandemic outbreaks in China in the month of January this year. After the outbreak of the deadly virus, most of the economic activities got closed and as a result China’s demand of oil decreased abruptly. As China is the biggest consumer of oil after the United States with almost 15% of the total oil consumption of the world.
The price began to sunk after that which is still going on as the pandemic further spread to almost every part of the world.
When the pandemic intenfied in the Europe and US, the situation become much more worse than before. This further decrease the oil demand and that means a further downfall of the already fluctuating prices was inevitable. As a result of it the price first time in the 21st century had hit the lowest.
The prices were about less than $25 per barrel. As i mentioned above the lowering of prices is not as simple as it looks. The lowering of prices was due to the diplomatic war between Russia and Saudi Arabia.
To understand this war first we have understand what role these two countries played in deciding the oil prices in the world. Saudi Arabia is one of the founding members of the organization of oil producing countries OPEC. Before 2010, the OPEC countries were responsible for around 80% of the total oil production in the world.
The OPEC was the powerful organization responsible for controlling oil prices but after 2010 the scenario had changed. Due to the introduction of shale technology, the production of non-OPEC countries had increased rapidly. Now United States is the biggest oil producer country of the world.
Now OPEC accounts for less than 50% of the total production of the world’s crude oil. As a result it had lost it dominance in the world of crude oil.
When the Covid-19 outbreaks in the world the Saudi Arabia had contacted Russia to lower down the oil production to stabilize the falling oil prices but due to many factors Russia rejected the idea. To counter Russia, Saudi Arabia decided to increase the oil production further by using it’s unique ability to pump the oil to it’s maximum.
Further Saudi’s has the lowest production cast of crude oil in the world so even with the lower prices they were still in profit. But this cold war indirectly hit the oil industry of the US as a result. As most of the oil companies of the US are privately owned and after considering the fact that US is eagerly willing to fullfill it’s oil usage on it’s own, these private owner had invested heavily in petroleum sector by getting heavy loans.
So the petroleum sector of United States is not as much stronger as the onces back in Russia and Saidi Arabia. The petroleum sector in these countries are under the government domain and it is easier to handle. Furthermore the Russians in the bigger picture wants to hit back at US after receiving a ban on their company for trading with Venezuela.
Despite all these factor the latest news is that the Russia and OPEC after taking a lot of time and having msny concerns got agreed on a mutual decrease of the production by 10% but still the prices are not getting up to their expectations.
At the moment this isn’t look feasible even with the reduction of the production. But this maybe the start of a new trick to counter the US onces the pandemic is over. Well to be real it is too early to say anything for now and time will show the consequences of this incident.
Blog Writer : Zeshan Nisar
Studies in MSC International Relation
Note: Etechjuice and its policy do not have to agree with this blogger’s views.