In the Russian media and Russian-language social networks in recent days, in my opinion, they have gotten too carried away with calculating which country, by how many millions or hundreds of thousands of barrels from what level and for how long, intends to reduce oil production as part of the new OPEC + deal and attempts to agree on it with the G20. Here there is a danger of losing sight of the essence of what is happening.
And it is not at all in the size and timing of quotas, and even less in the question of whether the decision of Russian President Vladimir Putin, who followed the insistent advice of the head of Rosneft Igor Sechin, to withdraw from the previous OPEC + deal was a mistake.
Vladimir Putin lost the oil blitzkrieg
Russia did this on March 6 in the hope of delivering a powerful blow to its main competitors in the world oil market: the United States with its shale production and Saudi Arabia with its state budget designed for very high oil prices. The statements made then by the press secretary of Rosneft Mikhail Leontyev and the Minister of Finance of the Russian Federation Anton Siluanov left no doubt that the motives were precisely that. Such a geostrategic calculation became a cardinal mistake of Vladimir Putin, about which I already had a chance to write on the fresh trail of events.
Andrey Gurkov, economic commentator for Deutsche Welle
Instead of a triumphant victory, Russia got a price war, which was immediately unleashed against it by the ambitious and ready to go all-in, the young Saudi Crown Prince Mohammed bin Salman Al Saud, who promised to flood the world and especially the European market, which is traditionally most important for Russian energy exports, with oil at dumping prices. …
Just a month later, on the night of April 10, Russia surrendered, agreeing to a new OPEC + deal with significantly more disadvantageous terms than it could have had, staying within the original deal and adjusting the volume of reductions as the COVID-19 crisis escalated. So Vladimir Putin clearly lost this oil blitzkrieg.
“Black gold“ loses its value
But the point, I repeat, is not at all in this. We realize the main thing: the efforts of the OPEC cartel and Russia, Kazakhstan, Azerbaijan, which have joined it, as well as a number of other producers, are aimed at reducing oil production, since the world economy simply does not need such a quantity, which leads to falling prices. Moreover, 23 countries have been reducing supply since 2017, when the first OPEC + deal entered into force, and the surplus on the world market of what was called “black gold” in the 20th century continued to grow.
And this, let’s not forget, in a situation where such potentially large suppliers as Venezuela, Iran and Libya, for various reasons, are already producing significantly less than they could.
The conclusion is obvious: in the 21st century, with its fight against climate change, energy efficiency, renewable energy, electric cars, and the movement against plastic that pollute the world’s oceans, it simply does not need as much oil as energy companies are able to extract today around the world using traditional and unconventional methods, be it from American shale rocks or Canadian oil sands.
The coronavirus pandemic, which has catastrophically collapsed global energy demand, has only greatly exacerbated the already inexorably growing global overproduction of oil. And for a long time. Russian Energy Minister Alexander Novak said that on April 9, at the negotiations on a new OPEC + deal, two, three and even four years were considered. This means that some participants seriously admitted that the period of extremely low oil demand could last until 2024!
OPEC + deal may fail
In the end, they agreed on two years, until May 2022. But is there any confidence that by that time demand will indeed recover at least to the level of the end of 2019? That there will again be as many planes with tourists and business travelers in the sky as there were before the pandemic, and there will be as many container ships on the seas, delivering, as before, countless goods from China to America and Europe?
And where is the confidence that the deal, the fate of which, due to the stubborn unwillingness of Mexico to reduce the proposed volume, continued to hang in the balance, will last for two whole years and each of its participants will certainly strictly observe the quotas allocated to it? The argumentation of the Mexican side draws attention to itself: they say, we have invested so much in increasing oil production that we want to finally get a return. And the rest did not invest? Do they not want to return at least something to them, too?
In short, the probability of violation and even collapse of the new OPEC + deal, if it will take place at all, is very high. And in this case, all its member states, not to mention companies from countries that have remained aloof, such as the United States, Canada, Brazil, Norway, will try to sell as much as possible at any price – or, if the cost of production is high, they will be forced to leave the market, they will simply go bankrupt.
The oil industry will not invest in its development
But even if the most brutal form of a war of annihilation by the collective efforts of exporters can still be avoided, the very fact of the OPEC + deal, which implies an unprecedented, by about a quarter, decrease in oil production for a long time or even, perhaps, forever, means a conscious, man-made approach to the end of the oil age …
After all, who, in the face of severe production cuts, would want to invest huge amounts of money in the development of the industry, in the construction of new, especially hard-to-reach deposits? Russia, for example, can now forget about its extremely costly plans to develop oil reserves in the Arctic. In the meantime, the world oil industry will stagnate and wait for better times, the most advanced economies of the planet will continue to move along the path they have already stepped on: along the path of decarbonization, rejection of fossil fuels.
Russia is forced to get off the oil needle
The Stone Age, the now-winged expression says, did not end because of a shortage of stones. They just had to give way to new technologies. The oil age won’t end because of the coronavirus, but COVID-19 will dramatically accelerate its end. The pandemic halted the development of the industry and at the same time dealt a severe blow to a number of key consumers of petroleum products. The cheapness of fuel for these industries is unlikely to help much now: the virus that has entered our lives forever will impose profound structural changes on air, sea and road transport.
In Russia, they talked for a long time about the need to get off the oil needle. And then suddenly the coronavirus knocked her out of her hands. Now the entire business model of the country will have to be urgently changed. Moreover, in extremely unfavorable conditions: foreign exchange earnings are declining, the economy is plunging into a deep recession, and because of quarantine, the death of Russian small and medium-sized businesses is rapidly accelerating, which should be one of the key elements of this new model. So a country that could be a very large business partner of Germany and the European Union urgently needs large-scale and bold reforms.
Posted by Andrey Gurkov, economic commentator for Deutsche Welle
The commentary expresses the personal opinion of the author. It may not coincide with the opinion of the Russian editorial staff and Deutsche Welle in general.
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