Saudi Arabia’s decision could ruin oil-producing countries

TOKYO, (BM) – Oil prices have fallen. The reason was that negotiations between Russia and Saudi Arabia regarding a reduction in production were stalled, and the latter began to seriously increase production. If oil becomes cheaper, fuel and electricity prices should drop. It seems to be a plus for our lives. Nevertheless, fluctuations in the oil market destabilize the situation in oil-producing countries, and can also cause chaos in the stock and financial markets. One should be wary of an uncontrolled increase in production.

Due to stagnation in the transportation of people and goods, as well as a decrease in the pace of industrial activity caused by the new coronavirus, oil demand fell. According to the forecasts of the International Energy Agency, in 2020 it will be lower than last year’s figure, which was not observed over the past 11 years. Consumption in China, which has been driving demand growth in recent years, has already begun to decline dramatically.

Meanwhile, Saudi Arabia said it would increase production by 30%: from 9.7 million barrels per day to 12.3 million barrels. Some oil-producing countries have followed the example of Saudi Arabia. If oil-producing countries start the production race amid falling demand, it is obvious what this will lead to. Due to concerns about oversupply, in the US oil market, prices per barrel fell below $ 30 for the first time in four years.

Most likely, Saudi Arabia aims to restore the lost share by increasing production. Nevertheless, the decision of Saudi Arabia, a leader in the Organization of Petroleum Exporting Countries (OPEC), was impulsive: did she think about the consequences of abandoning the role of coordinator of the oil market?

Low oil prices complicate the situation of oil-producing countries, which depend on oil revenues. There is a danger that they will not survive the decline in cost, since production costs are large and there are no reserves. Growing discontent can lead to regional destabilization: increased terrorists and the like.

In order to stabilize the market situation, the participating countries need to jointly adjust production volumes and agree on a price level that will suit both producers and consumers. This is the role of OPEC. A limitless mining race will only divide OPEC.

The decline in revenues caused by falling oil prices will jeopardize the financial foundation of US shale companies that earn on low-rated business papers. If oil-producing countries begin to withdraw the oil money they invest in stocks and real estate in developed countries, chaos will intensify.

Saudi Arabia and Russia need to find common ground to stabilize the market. This responsibility lies with the oil powers.


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Editorial team / Inosmi