HARDLY noticed in the rash of bad news on coronavirus infections and deaths around the world is a trade war that has erupted between Saudi Arabia and Russia.
Saudi Arabia is the world’s biggest producer of crude oil and leader of the Organization of Petroleum Exporting Countries (OPEC). When the coronavirus epidemic started closing down factories in nations around the world, these nations naturally cut down their imports of crude oil to run these factories. With its oil income down, Saudi Arabia proposed to reduce OPEC oil production to keep prices up.
Russia, however, disagreed with Saudi Arabia’s move. It proceeded to increase its own oil production and export. In response, Saudi Crown Prince Mohammed bin Salman gave the green light to the kingdom to pump at will – all-out production.
Both nations are bound to suffer huge losses as world oil prices plunge in the face of the huge supply resulting from their dispute. Russia said last Monday it can withstand oil prices as low as $25 to $30 per barrel for six to ten months. Saudi Arabia countered that it can afford a double-digit deficit in its GDP with oil prices in the low $30s.
Russia reportedly has amassed reserves of $570 billion and the rouble has become free-floating so Russia can quickly adjust to market conditions and devalue its currency. Saudi Arabia has foreign reserves of $500 billion and a low debt-to-GDP ratio of 25 percent, which gives it ample room to borrow.
The head of Moscow Exchange’s Supervisory Board, Oleg Vyugin, said Russia could face high inflation and interest rates because of the price war. There is thus a possibility, according to observers, that Moscow may decide to return to cooperating with OPEC by autumn if world oil prices remain very low.
The Philippines should feel the effects of the Saudi-Russia production war by next week. According to local oil companies, Dubai Crude, which is used as the benchmark for Asian oil markets, fell to a record low of $32 to $33 per barrel this week, down by $8 to $9 from last week. The rollback for gasoline prices could be as much as R4.75 per liter; for diesel, R4.60 per liter; and for kerosene, R4.50 per liter.
The Paris-based International Energy Agency said the spread of coronavirus has created “an extraordinary degree of uncertainty over what the full impact of the virus will be…. It is affecting a wide range of energy makers – including coal, gas, and renewables – but its impact on oil markets is particularly severe because it is stopping people and goods from moving around.” It cited the great contraction of demand in China and the disrupted travel and other economic activities in countries around the world.
To all these disruptions in the world oil market, we must add the price war between Saudi Arabia and Russia, but because it has helped to further drag down prices, we must welcome this one positive side of the worldwide coronavirus crisis.
