On 20 April the price of a barrel of oil turned negative for the first time, falling to -$37.63. Admittedly, this was a special case: the price of a barrel of West Texas Intermediate crude (WTI, a benchmark used in North America) for delivery in May. With storage running short, traders were panicking about receiving oil they could not store, so were briefly willing to pay other traders to take the oil off their hands. But still, it pointed to a more long-term shift.
Oil prices had already fallen thanks to the long-term growth of shale oil in the US, slower growth in the world’s boom economies (including China), the shift towards renewable energy in much of the rich world and most recently a power struggle between Saudi Arabia and Russia that has spilled yet more oil onto a depressed market. Then came coronavirus, which has frozen economic activity and led to full storage facilities – hence the collapse in the WTI. The result is an oil price now around or a little below $20, far below the range of $50-$100 where it has spent the recent years. This is disastrous for many countries in the Global South, the subject of my cover essay in this week’s New Statesman, that depend on oil exports.
The big question is: will the oil price ever fully “recover”? Coronavirus is changing how the world economy works. Supply chains are shortening as firms realise the benefit of producing closer to consumers. Remote working is booming and will probably remain lastingly higher. The crisis is also acting as a sort of preview of the sort of chaos that climate change might bring, strengthening the cause of renewable energy. What if the world never again consumes as much oil as it did before? Michael Liebreich of Bloomberg recently put it like this: “I’ve always said the end-game for oil is not when it reaches $200/barrel, it’s when it settles at $20/barrel”.
So what does it mean for the world if $20 oil is here to stay?
First, consider Saudi Arabia. Under Mohammed Bin Salman, its autocratic Crown Prince, there has been much talk of “diversification” – of turning the country into a hub for renewable energy, especially solar power, to prepare it for a post-oil age. But the reality has not matched the ambition. Plans for a giant solar plant in the Saudi desert were cancelled last October. Almost all Saudi energy production still comes from fossil fuels. The much-hailed privatisation of Aramco – the Saudi state oil giant – last November was a flop.
Even if the kingdom did pivot successfully to solar power, its entire political economy is based on the hugely profitable oil industry (Saudi Arabia extracts oil at a much lower price than many competitors). Remove the profits and you remove the whole basis of the Saudi royal family’s power – and of the US-Saudi relationship that fundamentally shapes the geopolitics of the Middle East. Remove the profitable Saudi oil industry and America’s relationship with the region changes, the power balance in the Saudi-Iranian rivalry shifts and a period of immense uncertainty consumes the region and leads, perhaps, to violence.
Second, consider that many other countries require a certain oil price to balance their budgets and maintain their political systems. Take Nigeria, the most populous country in Africa with a population of over 200 million, whose government budget balances at around $60 a barrel. Or take Putin’s Russia, whose budget balances at around $40 a barrel. In such oil-exporting countries a long-term fall of the price to $20 would mean governments left permanently out of pocket and unable to use public spending to quell domestic discontent.
As I note in the cover piece, already Zambia and Ecuador, two countries dependent on commodity prices, have asked to restructure their debts. Many more will follow as the coronavirus crisis drags on. The recent political instability in Algeria and Bahrain, two countries that were already suffering from the low oil price, represents a sign of things to come elsewhere. How many petrostate governments will be beset by such protests? How many will be overthrown or undergo political and foreign-policy crises? Any lasting suppression of oil and other commodity prices will change the geopolitical map of the world.
And third, consider US politics. The low oil price is hurting many in the superpower, especially among Trump’s base. Shale oil, a major employer in politically sensitive US states like Michigan, Arkansas and Ohio, is being battered by the price falls. The president – determined to salvage his economic record ahead of the election in November – may go to extreme lengths to help them. A hint of those lengths came yesterday when the president tweeted out his willingness “to shoot down and destroy any and all Iranian gunboats if they harass [US] ships at sea”. The missive pushed the oil price upwards again. Trump might get used to such boosts, especially as the presidential election nears, and deploy them to bolster the political loyalties of his base.
It is hard to imagine the long end of the oil age. It implies a wholly different way of providing energy to most of the world, new forms of transport and new ways of storing and transporting electricity. And yet the only question is when that end will come. Coronavirus, and the collapse in the oil price that it has accelerated, may well be the proof we need. The conclusion of the oil age may be upon us. It will change everything.