While the spread of Coronavirus outbreak worldwide has already had a profound effect on the world economy and has led to a recession in many countries, Saudi Arabia has increased its oil production in an unprecedented way, following a dispute with Russia which has led to a sharp drop in oil prices.
To know more about the Coronavirus impact on the global economy and Saudi Arabia's decision on the world economy and even on the political fate of the Saudi crown prince Bin Salman, we reached out to Mehmet Ogutcu, Chairman of London Energy Club.
Following is the text of our interview with him:
How do you see the effect of the coronavirus outbreak on the global economy?
In this oil price and market share battle, the trigger has been pulled - it will most likely result in the further erosion in world energy of the fossil fuels’ share, including oil. This process already started with the rise of renewables and electric cars but now it will quicken the pace.
In my view, the Third World War has already begun. New wars are no longer fought on the battlefield, with cannon, missile and fighter planes. Conventional wars have been replaced by asymmetrical, hybrid and proxy wars. We are experiencing artificial intelligence and technology wars. The trade wars, launched by Trump against the EU and China by his “America first” strategy, are still with us. Will the dollar continue to be an international reserve currency? Or will the ruble, renminbi, and euro be equally effective? How will cryptocurrencies progress? This is the currency war on the move. It is not prophetic to say that biological wars, water and food wars, and inter-civilization conflicts, as predicted by Huntington, will also intensify in the coming decades.
At a time when oil, coronavirus and other oncoming crises require global cooperation and joint action, we are in constant competition, hostility, and conflict in the international arena.
Oil importers should by definition benefit most from the falling prices if we do not count the depression effect of the international trade contraction. The transition from fossil fuels to renewables and greater energy efficiency should not be losing momentum in a low price environment. Our efforts to reinvent the current energy system to create mutual dependency, added value, prosperity, digital and green economy, and to renew the industrial infrastructure built on the back of fossil fuels should continue at full speed.
How did this last crisis break out?
OPEC's dominant power, Saudi Arabia, and its allies had decided to apply to the traditional method, namely to cut supply, in the face of the rapid decline of the demand for oil, because of the low economic activity in China and then eruption of the coronavirus.
They brought the cut-off to 1.5 million barrels higher than any previous production reduction to offset the situation with supply abundance and reduced demand. It was envisaged that 1 million barrels would be provided by 13 OPEC countries, with the remaining 500,000 barrels by Russia and its non-OPEC producers.
The rise of renewable energy, the reduction of costs and the spread of electric vehicles had already begun to erode the future of oil.
When discussing with OPEC at the meeting in Vienna, Russian Energy Minister Novak received a special instruction from the Kremlin: "Do not accept the further cut, come back home". According to what we learned later, it was Igor Sechin, one of Putin's close confidants, and chairman of Russia's biggest oil company Rosneft, who called the shots in this regard in Moscow.
Sechin, who has been against the cooperation with OPEC from the outset, thinks that these cuts will benefit most American shale oil producers and could be instrumental in reducing Russia’s market share.
After this discord becoming clear and Russians showing no sign of conciliation, the Saudis sent a message via Aramco to all customers offering a serious discount on prices. They also decided to increase the production level even more.
The result was that the price of oil, which was around $73 in early January, fell below $ 30 during the Black Monday. We witnessed the fastest fall in the history of oil prices.
Is this a deliberate effort to weaken Russia?
On that Monday, the stock market wiped out a fortune of $ 3.5 trillion - almost four times that of Turkey's GDP. There has been a loss of at least $130 billion in the value of large international petroleum companies, such as Shell and BP. We also know that the world's largest oil producer, the USA, has begun using its “energy weapon” with a view to capturing a market share from Russia and Saudi Arabia.
American shale oil producers were already in trouble because of the low prices, their debts grew for a long time, and some of them were on the brink of bankruptcy. After this dramatic decline, there is news now that Trump is considering a package of aid to these companies in difficulty.
Saudi Arabia's current account deficit is getting worse; it urgently needs the injection of fresh money through higher prices. The public offering of Aramco did not go as well as desired, its share value is decreasing. The oil production and processing facilities hit by unmanned aerial vehicles from Yemeni militants also shattered the assertion that this country is risk-free in uninterrupted production.
It is almost impossible for Saudi Arabia to endure low prices for a long time. Maybe a month or two, that's all. At least $85 a barrel price is required to meet the 2020 budget, which has a deficit of over 50 billion dollars, according to IMF. The Saudi royal family is in turmoil. The King is said to have died or is on his deathbed.
Russia has been under American sanctions for years but continues to resist external pressures despite all its negative economic impact in the country. I think Russians are better positioned and prepared in this war compared to the USA and Saudi Arabia, and can settle for the $42 a barrel price level to balance its budget.
My guess is that while the USA, Saudi Arabia, and the Persian Gulf countries can work together in the coming period to influence the markets, Russia can team up with important OPEC producers such as Venezuela and Iran and assume the leadership of non-OPEC producers.
Mehmet Ogutcu is Chairman of London Energy Club, and CEO for Global Resources Partnership. He was a former Turkish diplomat, advisor to the Prime Minister, senior executive of International Energy Agency, OECD and British Gas.
Interview by Zahra Mirzafarjouyan