US, WASHINGTON (ORDO NEWS) — It seems that it could not be worse, given that on Monday oil went to negative territory. WTI closed the day at $ 37.63 a barrel, Brent hit 18-year lows. Oil has recovered significantly since then, but many industry experts say the worst is yet to come. The problems that led to lower oil prices have not disappeared.
With the development of the pandemic, oil demand fell sharply. However, when Russia and Saudi Arabia, the leading members of OPEC +, came together in an attempt to develop a strategy, negotiations came to a standstill and quickly escalated into a full-blown oil price war amid a tremendous oversupply of 10 million barrels per day. When, due to an oversupply of supply, there was a threat that the storage facilities would be full, US oil prices fell below zero.
“Can Brent, like WTI, escape into negative territory?” – With such a question, Bloomberg addressed its readers this week. “Of course!” They answered. If the international oil markets follow the example of the United States, a full-blown crisis in the energy sector will begin. And then the following question arises: what will happen if the oil industry does not recover?
“The collapse of the oil market in the coming months will cause socio-economic upheaval in several regions. Political disruptions and shifts in the balance of power will begin,” says Fate Kaplan of Slate. The consequences will be frightening for countries whose GDP is highly dependent on oil revenues. Analysts build a particularly gloomy forecast for oil autocrats, leading oil producing states such as Saudi Arabia, Russia, Azerbaijan, Iran, Iraq, Qatar and Kuwait. And these are just a few countries that will have to fight to maintain their power if oil loses its influence.
60% of Saudi Arabia’s GDP comes directly from oil revenues. Oil sector revenues account for more than 60% of the total government budget and 75% of national exports. Iran, Iraq, Qatar and Kuwait are even more dependent on oil. A third of Russia’s GDP, half of the budget and two-thirds of the country’s exports depend on oil revenues. “Oil revenues account for only 8% of US GDP. This is a significant share, which in some states has a strong influence. But it is not as much as in other countries,” Kaplan writes.
All this can lead to serious instability and geopolitical tensions, especially in the Middle East: “Due to quarantine against the backdrop of coronavirus, which led to a sharp drop in oil demand, many countries will not be able to pay their bills, bribe the military or provide basic social services to their to the population. ”
Russia and Saudi Arabia have significant sovereign wealth funds. This will help them overcome a short-term oil price crisis, but a long recession will lead to serious consequences and even conflicts.
In addition, there are countries that do not have economic airbags: in Venezuela, the worst economic crisis in modern history, it is almost 100% dependent on oil revenues. Ecuador is in a slightly more favorable position, its economy may shrink by as much as 4% of the loss of oil revenues.
These countries will have to diversify their economies, no matter what. The collapse of the oil industry is inevitable, the world is moving from fossil fuels to alternative sources of renewable energy. Even Saudi Aramco acknowledged that by the middle of this century it will reach a peak in oil production.
Oil states will remain a thing of the past in just a few decades. The question is, will they leave, scandal aloud or whimper quietly? For the sake of global security and for the sake of millions of citizens dependent on oil-producing states, this should be the last option.
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