Lessons in oil and economics from the great lockdown
One of the compensations of the lockdown has been the daily webinars organized by the consultancy Gulf Intelligence on the energy industry, and in particular the Sunday show.
Not only does it set the tone for the week in the midst of the most turbulent period in the history of oil markets, but it also brings together two of the leading commentators on global energy markets for 30 minutes of cerebral sparring on a subject that always provokes strong views, never more so than in crisis.
In the red corner of the forum, John Defterios, emerging markets editor at TV network CNN; in the blue corner, Christof Ruehl, former chief economist of BP and head of research at ADIA, the UAE’s premier sovereign wealth fund, now senior research scholar at the Columbia University Center on Global Energy Policy and a fellow at Harvard Kennedy School.
The subtle differences of opinion between the two on such crucial matters as crude storage, oil demand recovery and Texas rig counts are real, but not personal. “We know each other well,” Ruehl told Arab News. Over the course of what the oil industry is calling “Black April” — when Ruehl and his family were in enforced stay in the UAE — the two had plenty to discuss. “It certainly was exciting. It’s been a true roller coaster,” said Ruehl, outlining the events that have taken us to an unprecedented place in the energy business — the biggest ever destruction of global demand, followed by the biggest ever cuts by Saudi Arabia and Russia in the Opec+ alliance, and the ongoing downturn in the shale business that has knocked the US off its perch of global energy dominance.
Some analysts — especially in the US — saw it all as an orchestrated design by Opec+ to destroy American shale, but Ruehl does not agree. “If you think of design as a conspiracy theory, a plot by Saudi and
Russia against the US, then no.
But if you think of design as a pattern that was becoming more pronounced and visible over a period of time, then in many ways, yes,” he said. The collapse in demand resulting from the pandemic lockdowns was what the economists call an “exogenous shock” accelerating pre-existing conditions in global oil markets. But he thinks that it is wrong to talk about “victors” in the oil price wars that collapsed crude prices worldwide and from which the industry is only now recovering. “Everyone is dealing with a lower oil price. All was obliterated by the virus and the sudden collapse in demand — there are no winners here.The world will enter a period of lower oil prices, Saudi Arabia will enter a period of lower production,” he said.
Oil prices have pulled back from the bottom, having fallen through the floor on April 20 when the price of a barrel of West Texas Intermediate crude was trading at negative rates.
But there is a danger to that nascent recovery. “If prices shoot up too fast because you’ve been effective in cutting supply, you will get cheating in the Opec+ segment, and you’ll get shale and others coming back in the private segment,” he said.
High energy prices would also threaten the still-uncertain economic recovery after the lockdowns end, because “the majority of people on the planet are not oil producers, they are oil consumers,” and could also pose a risk for future investment in oil.
On the prospects for recovery, crucial both for oil prices and to prevent the world slipping into a 1930sstyle Depression, Ruehl believes that we are still at the mercy of exogenous events. “Oil demand is hostage to the recovery, and the recovery is hostage to the pandemic,” he said, pointing out that most forecasters have to cause oil prices to spike, but barring these “prices of $70 or $80 seem out of the question at the moment,” he said.
The carnage of the past few weeks will leave the industry permanently changed, not least in how it is governed, as the US, Saudi Arabia and Russia collaborated in an unprecedented way to halt the slide.
“Basically we had the three big producers sitting down behind closed doors and coming up with a package. Does that herald things to come?” he asked, raising the prospect of an Opec++ deal between the three producers.
On the question of US supremacy in the global energy industry, the new normal of the oil market is stark. “It wouldn’t leave the US much room to call themselves energy independent, much less dominant. The demise of the old order isn’t just a change for the Middle East, but also for the highcost producers who were freeriding,” Ruehl said.
Can the Saudi-Russia pact on production cuts persist, given the very different
pressure those