In the old days, to trap monkeys, people put some rice in dried coconuts, cut a hole just enough with the monkey’s hand. When the monkey tries to reach in to get rice, it will be stuck in the coconut. The monkey then had to face two choices: one was to skip the profit first so it wouldn’t get stuck, the other was to manage to get a few grains of rice back and not get stuck. Behavioral science shows that people tend to be inclined to choose the second option, because a few grains of rice are risky and will be flustered when confining their hands to the coconut of greed. The world energy market is currently facing a similar situation.
In the midst of the shadow of SARS-CoV-2 covering all indicators and the recession is probably just a matter of time with increasingly clear signs. The oil war took place with the first 30% discount from Saudi Arabia, the deepest decline since the 1991 Gulf War. This move caused the collapse of crude oil prices and was a total pushback. The main rival of Saudi Arabia that wants to be in this blow is Russia when it refuses to enter into an agreement with OPEC to reduce oil production to pushed the price of crude oil up.
Since the United States enacted sanctions on companies involved in Russia’s Nord Stream 2 gas pipeline, Russia must continue to maintain oil production as an effort to maintain its main interests. Their values and maintaining high oil prices are also a way to avoid breaking the ruble. By announcing an increase in production to 12 million / barrel / day from April 2020 to pull down oil prices in response to other OPEC allies to eliminate weaker companies, Riyadh simply pushed. The rest of the world entered a new type of oil war.
But what allowed Saudi Arabia to make such a bold and risky decision? Of the largest oil producers in the world today, only Saudi Arabia has the ability to increase output dramatically without losing revenue due to falling oil prices. For example, if the price drops at 15%, but the amount of oil sold increases accordingly, then Arab’s revenue will not change much. This advantage comes from Saudi Arabia’s outstanding oil production technology due to its long tradition and very low production cost, only about 2USD / barrel of oil. In theory, this calculation seemed to work for Riyadh, but they almost ignored the fact that oil was a finite resource and could be depleted.
There is a famous saying in Sylvester Stallone’s Rocky Balboa (2005): “The problem is not how hard you punch. It’s how much you can take a punch and keep moving forward. ”(… It ain’t about how hard you hit. It’s about how hard you can get hit and keep moving forward.) Saudi Arabia and Russia is measuring each other’s stamina because of falling oil prices, both and their allies must suffer huge budget deficits as oil processing companies are taking advantage of the time to reduce prices to store goods, at the moment. , large oil exploration companies cannot reduce production to maintain market share. Saudi Arabia has more than one reason to believe that this move is likely to force Russia back to the negotiating table.
But Russia is not stupid.
The Russians practically anticipated and prepared for this war long before. First, Moscow has restructured its national revenue, which is no longer so dependent on oil as it was in the previous period, at just 30% now. Besides, Russia has become the country with the largest gold reserves in the world and the buffer of foreign currency reserves of over 435 billion USD will help them withstand many attacks for a relatively long time. By pillarism “avoiding petrodollar” (not trading oil in US dollars), while Saudi Arabia is still facing many other economic problems coming from SARS-CoV-2, Russia’s export market are showing very good signs of recovery. A key weight in this endurance competition that makes the balance inclined to Russia is that Russia only needs the price of 38 USD / barrel of oil to not run a budget deficit while rival Saudi Arabia needs at least double the price.
War is always a zero-sum game, Russia and Arab are countries that will suffer more or less whether they achieve their desires or not. But if both competitors are damaged, who will benefit? Interestingly, that is the United States.
At first glance, the United States is clearly the party that will suffer a great deal, which is inherently another goal of the Russians in this war. Since the United States developed shale oil and gas technology, it has become the world’s largest oil exporter. But the world’s highest oil production cost has turned into the achilles heel of the flag of the United States, if Russia only needs about 20 USD to produce 1 barrel of oil, the US needs to spend more than 50USD / barrel to ensure for the operation of the plants. The sharp drop in oil prices and the high production costs have pushed U.S. oil companies closer to the risk of bankruptcy, as their $ 86 billion bank debt is nearing maturity. term by 2022.
But this cannot kill the US economy. The United States has long played two roles in the oil and gas market, both being the largest producer and the largest consumer. Energy in general only accounts for 10% of US GDP while 70% of GDP comes from consumption, but every time the price of gasoline decreases, consumption will be strongly promoted. On average, for every 10 USD reduction in a barrel of oil, the US GDP will increase by 0.025%. This means that in this war, Americans will simply sacrifice a few less important companies but in turn create a significant force on consumption to stimulate growth – this is one thing Donald Trump always wants to look forward.
Saudi Arabia – one of the closest US allies has chosen a moment to start the oil war that is quite unexpected even for the other members of its OPEC bloc. In the midst of so many negative predictions about the global market at this time, the absurdity of one person sometimes becomes very reasonable to others.
Well, the action of right or wrong but to know how to reincarnate right on the oil field is always right. The British were still leisurely going to music, the Vietnamese were still free to go on a trip because of the drop in gasoline prices. SARS-CoV-2 will then pass like many other pandemics, the order of the oil market or the world will contemplate even if there is a change or polarization, it will only revolve around the issues of economic benefits and political position.