Crude move

Oil price war does no one any good

This price war and others that went before tell us one thing: geopolitics and oil should not mix.

BRUTAL Brent is back. On March 9, benchmark crude, Brent, had one of the biggest falls in six years, dropping close to US$30 per barrel. At press time, Brent was hovering around US$34. Compare this with last year’s average Brent price of US$64, a drop of US$30 per barrel. Many analysts see the crude carnage continuing. It appears that the Organisation of Petroleum Exporting Countries (Opec) was planning a 1.5 million barrels a day cut earlier to address the fall in demand caused by Covid-19. Saudi Arabia, a de facto leader of Opec and a reluctant swing producer, and Russia could not agree on how deep the cut should be. As the Opec-Moscow 2016 crude alliance crumbled, Russia and Saudi Arabia flooded the market in a tit-for-tat spat. This, despite the International Energy Agency revising global demand for this year downwards by 90,000 barrels per day to 99.9 million barrels per day.

But the Russians weren’t just squabbling with the Saudis. They had a bigger enemy in the crosshairs: the United States. Where there is crude, geopolitics isn’t far behind. Russia is aiming at two targets. One, American shale producers. Russian oil producers, chiefly Rosneft, have been losing their market share to these new kids on the block as the Opec-Russia alliance pushed crude prices up past US$55. The Russians know at US$34, the US shale producers have to shut rigs, slash budgets, reduce manpower and even go into bankruptcies. Two, Moscow is mad at sanction-happy Washington and understandably so. Most recently, it had to put its pipeline to Europe on hold because of US sanctions. The US has been bullying Iran thus for long. But Russia is no Iran. The Russian bear knows how far the American eagle’s wings span.

Crude oil geopolitics will punish not only price war combatants but also innocent others. Which include small oilproducing nations, whose economic future is oil revenuedriven.

First, the combatants. Russia’s cost of production isn’t cheap. The Russian official view is that it can cope with a crude price of between US$25 and US$30 into 2030. This may be more of psyching the Saudis into reconsideration than a reflection of real cost. If some analysts are right, a more sustainable crude price for Russia is US$40. While Saudi Arabia’s production cost is low — a Wall Street Journal analysis put the kingdom’s cost at US$8.98 in 2016 — other costs may enter into the equation to make it a lot higher. A Forbes magazine analysis of Saudi Aramco’s financials puts the kingdom’s national oil company’s breakeven crude price at US$40. What this means is that the price spat has to be funded by sources other than oil revenue. When these dry up, it will be a fall in pride and rise in price.

Second, for non-Opec oil producers like Malaysia, anything below US$62 (national budget assumption) is bad news. For every dollar drop in crude from US$62, Malaysia stands to lose RM300 million. Based on the Brent price today of US$34, Malaysia will face a deficit of RM8.4 billion. This price war and others that went before tell us one thing: geopolitics and oil should not mix. This, mingled with the animus of big powers, misses a common enemy of the world: Covid-19.