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The United States, Saudi Arabia and Russia - is such an Alliance necessary

12.04.2020 10:39

Now, oil markets are sending confusing signals. When Russia walked out on OPEC+ and contributes to more output cuts, Saudi Arabia vice versa has increased the production of black gold. Whatever Riyadh’s intention, this “price war” was quickly made meaningless by the impact of the new coronavirus on global oil demand. The price collapse has been beyond anything anyone could have imagined.

Experts note, now, storage room for crude is becoming scarce, moreover they caution that plunging prices may threaten global economic stability. World community agree that prices should stop falling; and yet no one seems to argue that a very low oil price is exactly what the world’s economy needs to recover.

However, experts note, that the “price war” and pandemic of coronavirus lead to the formation strange bedfellows. So, some American shale producers are advocating that their country blocks Saudi oil imports; others want to talk to OPEC. President Donald Trump’s government has expressed an interest in cooperating on global oil supplies with Saudi Arabia and Russia. In addition, the USA are pushing OPEC+ to resume negotiations.
Analysts wonder whether the world community will witness the formation of an “unholy"” Alliance between Riyadh, Moscow and Washington to combat oil price volatility.

Today, the world has three centers of oil production, each with its own governance structure, its own economic and strategic interests, and each with an entourage of similarly structured, smaller producers in geographic proximity. Taken together, these three - the USA, Saudi Arabia and Russia  -account for 45% of global liquid hydrocarbon production (almost half of which now comes from the USA).

According to experts, beyond the immediate emergency, meaningful long-term cooperation to “stabilize” prices would require state intervention or US import restrictions. Any of these would mean curtailing the benefits of competition and open entry to which the U.S. shale industry owes its existence. In the short term, such measures would fly in the face of supporting the post-pandemic economy by pushing up fuel costs. In the long term, they would curtail the capacity to innovate on which we depend so heavily in the transition to cleaner fuels.

So the answer on whether the three big producers should be joining hands on the crude price is no. The rest of the world has very little to gain from more intervention in global oil markets. What are needed instead are better rules to safeguard competition on a global scale. This may be wishful thinking. But the temptation to “manage” the market, now or when oil demand approaches in earnest peak, should be resisted.