Russia ignores the history of the oil market

US, WASHINGTON (ORDO NEWS) — There are objective factors on the market that significantly reduce demand and increase supply.

Before the March events, the oil market had already experienced several landslides. These are six episodes of a serious fall in oil prices: January-July 1986, October 1990 – April 1991, October 1997 – April 1998, May-November 2001, autumn 2008 (caused by the beginning of the global financial crisis) and the period between 2014 and 2016.

As for the reasons for the fall in prices in 2014, according to the World Bank report, in comparison with previous episodes, the main role was played by the proposal, and the only similarity here can be traced to the collapse in 1986. Both times, this happened after a significant increase in oil prices, which provoked an increase in deliveries from countries outside the OPEC.

In 1986, these were supplies from Alaska, the North Sea and Mexico, and in 2014, supplies of American shale oil and Canadian oil and biofuel. In both cases, OPEC changed its policy: it abandoned price controls in favor of protecting its market share.

First it was the slogan “war for prices”, and later “the need to maintain market share at all costs.” As for the four other episodes of the fall in oil prices, they occurred due to a serious decline in global demand.

According to a World Bank report, the fall in prices in 2014 was due to a significant increase in supply, and OPEC, of ​​course, did not intend to reduce production to maintain prices.

On the contrary, from the report of the International Energy Agency for 2015 it follows that, unlike previous periods of price reduction, in 2014 it was due to the simultaneous influence of supply and demand. We are talking about a record increase in supply, on the one hand, and an unexpected drop in demand, on the other.

With regard to the proposal, the technology for the production of shale oil laid the foundation for a change in the familiar division of labor between OPEC countries and independent producers. The current fall in prices occurred at a time when the dynamics of global demand and the status of oil as the main energy carrier are undergoing significant changes. Emerging economies (led by China), which ten years ago resembled an incessant engine and where there was a steady increase in demand regardless of fuel prices, have moved to a stage of low oil use.

The global economy, which has undergone changes as a result of the revolution in the field of information technology, has generally become less energy intensive. Concerns about climate change have also affected energy policies. The globalization of the global gas market, coupled with a systematic reduction in costs and increased access to renewable energy sources in recent years, has led to the emergence of real competitors for oil.

Obviously, the fall in oil prices has now begun due to a sharp decline in demand due to the spread of coronavirus and, as a result, the closure of production and reduced mobility of citizens.

Then, Russia rejected the plan to reduce oil production by another 1.5 million barrels. If countries do not want to coordinate production policies, alternative policies are required to protect their market share. Regardless of whether the reason for the collapse in prices is low demand or higher supply, or both factors combined, the result will resemble the war of all against all.

The world oil market is actually a single market, therefore, an increase in the share of any of the producers will necessarily reduce the share of other players, and therefore everyone will strive to protect their part of the market. Naturally, the one whose oil is cheaper, or the one who is longer than others willing to bear big losses. Yes, it’s rather strange to try to maintain market share in the context of low prices and increasing production costs, as Russia does.

The past episodes of falling oil prices we have described are, of course, known to decision makers in this country, however, they have not learned a lesson from them, rejected any measures to reduce oil production under the OPEC + agreement and now accuse the Arab Gulf countries of falling prices.

Andrei Belousov, Russia’s first deputy prime minister, as quoted by the TASS news agency, said: “Russia’s position has never been to collapse oil prices. This is exclusively an initiative of our Arab partners. Even the oil companies, which are objectively interested in the markets, had no position that it was necessary to break the agreement [OPEC +] and withdraw from the agreements.”

Moscow seems to be going through difficult times due to a sharp drop in oil prices. According to the Minister of Finance, this year, price changes could cost the country about $ 39 billion. “Therefore, is there any point in a further reduction if other manufacturers increase it?” Asked the general director of the Russian company Rosneft. If, in his opinion, the reduction is not possible, this will lead only to one thing – a rapid collapse in prices, as is evident against the background of past experience.

The head of Rosneft expressed confidence that by the end of 2020, world oil prices could return to $ 60 per barrel if shale oil leaves the market. This is also illogical, since the higher the price, the greater the volume of shale oil production due to the flexibility of companies in this industry.

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The article is written and prepared by our foreign editors from different countries around the world – material edited and published by Ordo News staff in our US newsroom press.