Who won the previous round of the oil price war?

Some are now asserting that China — the world’s largest crude importer — emerged victorious at the expense of major global crude oil producers.

The battle erupted in March when Russia declined to give in to the Saudi demand to cut output further. Yet, the very next month, US President Donald Trump intervened directly and the battle had to be abandoned. But by the time, the damage had already been done.

The cost was immense to major stakeholders, Saudi Arabia, Russia, and the United States. They emerged badly bruised.

In April, the value of Saudi oil exports plummeted by 65.4 per cent, or by US$ 12 billion. This was disastrous for the single product economy of Saudi Arabia. Riyadh was in no position to sustain it.

In order to generate resources and reduce expenditure, allowances of public servants were slashed, VAT was tripled and Saudi Aramco had to announce a cut in capital expenditures from $35-40bn to $25-30bn. Riyadh also announced increasing its debt ceiling from 30pc to 50pc of GDP, while expenditure was cut by 5pc.

Moscow’s economy also remains dependent on petrodollars — albeit to a lesser extent than Riyadh. Following the advent of the oil price war, the ruble dropped by over 30pc between the start of 2020 and 18 March. Further, as per the estimates of the Russian government, the country was forecasted to run a surplus of 930bn roubles ($11.4bn) in 2020. Yet, later projections underlined a budgetary deficit for Russia.

The US shale industry presents a similar story. The US tight oil or shale rig count has fallen 69pc this year from 539 in mid-March to 165 early last month. Tight oil production, the backbone of the US emergence as major oil power in recent years, appears set to decline 50pc by this time next year. Faced with a wave of shale bankruptcies, US oil production is now projected to fall to less than 8 million barrels per day (bpd) by mid-2021, from 13m bpd earlier this year.

So far this year, bankruptcies in the US energy industry have exceeded 20 filings from companies with more than US$50m in liabilities, Bloomberg revealed. The dream of US dominance of the crude world is over, some are now beginning to assert.

Yet, from all this debris emerges China – a clear winner. While crude prices were literally on the mat, China kept filling its strategic reserves. “China is moving forward with plans to buy up oil for its emergency reserves after an epic price crash,” Bloomberg repor­ted in April. “The world’s biggest importer is taking advantage of a 60pc plunge this year to snatch up cheaper barrels for its stockpiles.”

In order to buy as much as it can, Beijing had plans then to use commercial storage space as well, while it also reached out to the private sector encouraging them to fill their tanks with cheap gas as part of a nationwide contingency plan, Bloomberg reported then.

“The initial target is to hold government stockpiles equivalent to 90 days of net imports, which could eventually be expanded to as much as 180 days when including commercial reserves,” the Bloomberg report continued. “Ninety days of net crude imports is about 900m barrels,” it added.

China has stored so much oil that it could practically halt all oil imports and get by just fine for a while. In other words, Russian President Vladimir Putin and Saudi crown prince Muhammed bin Salman need to stay in the good graces of President Xi Jinping. This has global consequences, including for the United States, highlighted Ellen R. Wald.

With budgets of both, dependent far too heavily upon crude sales to China, Beijing is unique positioned. It ‘can simply turn the im­­p­­­ort taps off, to make things extremely un­­co­m­­­fortable for Saudi Arabia and Russia’, commented Oilprice.com in an editorial piece.

Russia and Saudi Arabia’s struggle for market share has leveraged China in a position ‘to dictate conditions,’ says Clara Ferreira Marques. Moscow and Riyadh need sales to China, but thanks to a huge inventory, China could stop purchasing from both or either of them, for at least 3-6 months. This would be a recipe of disaster for Moscow and Riyadh.

On the global stage, it would thus be difficult for Russia or Saudi Arabia to take sides against China on any issue. And this carries immense geopolitical implications. Dictated by oil dynamics, a new world order seems in the making.

And interestingly, the US is not at the centre stage.

Published in Dawn, July 5th, 2020