[The Editors' Verdict] The World's Oil 'Big 3' Fuel Global Economic Instability

International oil prices have fallen to levels seen during the 1998 East Asian financial crisis. At the beginning of this year, prices were around $60 per barrel (based on Texas Intermediate crude), but around the OPEC+ meeting on the 7th of last month, prices plummeted from the $40 range to $20. The meeting intended to stabilize international oil prices instead became a bomb of price instability.

When international oil prices fall, it can be advantageous for oil-importing countries like South Korea, but it weakens the economies of resource-exporting countries, leading to a reduction in global demand. Orders for oil tankers and drilling rigs decrease, and as petroleum product prices drop, refining companies incur losses. This, however, only applies when the price drop is within a level the market can bear.

However, in the current global economic crisis, a sharp decline in oil prices becomes another serious threat to the world economy. Due to the halt in economic activities caused by the novel coronavirus disease (COVID-19), demand for oil is decreasing, so oil-producing countries logically should reduce production. Yet, at the recent OPEC+ meeting, Russia opposed Saudi Arabia's call for production cuts and instead advocated for increased production.

Russia's reason for refusing to cut production was that if the world's largest producer, the United States, did not reduce output, maintaining high oil prices through production cuts would only benefit U.S. shale gas companies. When Saudi Arabia, which had pushed for cuts, suddenly decided to increase production to show Russia a lesson, international oil prices halved within days. With demand falling but production rising, storage facilities are on the verge of being insufficient.

Even when OPEC agrees on production cuts, promises have often not been well kept in the past. When international oil prices, which were $100 per barrel in 2014, halved to the $50 range six months later, Saudi Arabia declared it would not cut production even if prices fell to $20 to punish Russia for disrupting the oil market, causing prices to plunge.

Since then, Russia, the world's second-largest oil producer, and Saudi Arabia, the third, maintained a cooperative rather than competitive relationship. However, with the development of shale gas, the United States became the world's largest oil producer in 2018, straining the cooperation between Russia and Saudi Arabia.

Additionally, as Russia was nearing completion of the Russia-Europe gas pipeline (Nord Stream 2) to increase gas exports to Europe, U.S. President Donald Trump threatened through this year's National Defense Authorization Act (NDAA) to sanction companies involved in the Nord Stream project. This caused Russian President Vladimir Putin to harbor resentment against the United States. Russia views the Saudi-led international oil price drop as an opportunity to cripple the U.S. shale gas industry.

Saudi Arabia is targeting Russia, and Russia is targeting the United States in a 'chicken game.' The most frustrated party is the United States. Because shale gas must be extracted by applying hydraulic pressure to deep underground rock formations to release gas through tiny fissures, production costs are inevitably higher than those of Russia or Saudi Arabia. Although it varies by company, the breakeven point is roughly $50. The Texas regional economy has already been devastated more by the oil price drop than by the COVID-19 crisis. If low oil prices continue, many of the approximately 9,000 shale gas companies will be driven to bankruptcy. Oil companies are also expected to suffer huge losses. This is why the U.S. stock market has not gained momentum despite President Trump's massive $2,800 trillion economic stimulus package.

International politics, not market logic, is dominating the global energy market. Traditionally compliant with U.S. demands, Saudi Arabia is now standing firm on its pride against U.S. calls for production cuts, while Russia is confronting the United States over energy hegemony. Saudi Arabia is the chair country of this year's G20 summit. The 'COVID-19 G20 Summit' held on the 26th of last month was far less substantive in its agreements compared to the 2008 global financial crisis. While the high contagiousness of COVID-19 encourages self-help measures, it is presumed that the confrontation among the world's energy 'Big 3' significantly contributed to the lack of meaningful outcomes.

Jin-Kyo Jung, Professor, Department of International Trade, Inha University