As the world is fighting the coronavirus pandemic, due to the contraction in world economy caused and will be further exacerbated by the pandemic, a new area of feuding emerged for oil producers as well.
The contracting economies of the members of the Organization of the Petroleum Exporting Countries (OPEC), which includes the world’s biggest oil producers, and primarily Saudi Arabia, which requested from Russia to decrease the oil supply. Seeing the decline in oil demand along with the contraction in world economy due to the novel coronavirus as an opportunity, Russia wants to keep the existing markets squarely in its hand and, despite the low price, it wants to offset the loss resulting from this decreased price by selling a lot more oil.
Hence, when Saudi Arabia’s request to restrict the supply was not approved, these countries’ decision to continue with oil supply caused the per barrel price of Brent oil to drop to as low as $32. In other words, oil prices almost plummeted.
The 25 percent drop in the barrel price of Brent type crude oil within a day was recorded as the highest decline since the start of the 1991 Gulf War.
RUSSIA-US-SAUDI ARABIA TRIANGLE
Russia-U.S. and Saudi Arabia are in the oil price war. Russia, one of the most important parties to this war, is intent on keeping existing markets in its hands while also teaching the U.S. a lesson through decreased oil prices, the latter being a producer of shale gas, oil, and the world’s biggest natural gas producer.
As the price of natural gas is determined based on oil, with the decline of oil prices, the U.S. is going to have difficulty selling the high-cost natural gas in European countries and, in fact, EU countries are going to become more dependent on Russia.
However, the decision of OPEC countries – which includes Saudi Arabia – regarding oil supply further dropped oil prices. Though these prices may continue to be maintained for producing countries like Russia and Saudi Arabia, which have excess reserves, the decline in oil demand worldwide becomes more problematic for countries that are highly dependent on oil and natural gas revenues and do not have many reserves.
If a large portion of countries’ revenues consist particularly of oil and natural gas sources, the excessive decline in the prices of these products, or the possible drop in their demand may lead countries into an economically difficult situation, while sending many economies into crisis.
So, is this the start of a new economic crisis?
IS CORONAVIRUS A TRIGGER OF A NEW GLOBAL ECONOMIC CRISIS?
While the shrink in the Chinese economy, the first country where the coronavirus appeared, threatens world economy, global economies are under threat and at the point of collapsing with the spread of the pandemic throughout the world.
The jump in oil prices besides the contraction in the global economy and problems in trade, further compounded the reach of the virus.
Due to China’s role in the supply chain and its share in the world economy, this situation has become the sign of a crisis for the economies of developing countries. The economic problems that have formed today with oil prices hitting rock-bottom is the trigger of global economic crises both for developing and developed countries.