Сoronavirus and imbalance of supply and demand in the oil market. Steven Griffiths shares his opinion
Steven Griffiths, the Global Energy Prize International Award Committee member, Senior Vice President for Research and Development, Khalifa University of Science and Technology (KUST).
The recent dramatic decline in oil price is a consequence of (1) demand destruction resulting from COVID-19 spread and the resulting reduction in global economic activity and (2) lack of agreement by OPEC+ to reduce oil output in an effort to stabilize prices given the lower demand. Hence, we now have a situation of much lower projected oil demand in 2020 and potentially a much higher global oil supply with particularly Saudi Arabia and Russia intending to increase their production to gain market share.
This supply and demand imbalance may very well push the price of Brent crude to near $30 per barrel for much of 2020. The impact on the global economy from lower oil prices is geography dependent. Oil importing countries will benefit from lower energy costs while oil exporting countries will be strained by lower government revenues. Particularly the United States may face economic difficulties of sustained low oil prices create economic turmoil is shale oil producing regions. The Russian economy may actually benefit from lower oil prices over the long run if the low prices curtail the dramatic increases in US shale oil output and allow lower cost oil producers, such as Russia, to gain market share. In the short run the Russian economy has become much more resilient in recent years to low oil prices. Hence, Russia can very likely endure a sustained period of low oil prices in the $30 to $40 per barrel range without a significant, negative economic impact. This is indeed why Russia is willing to allow oil prices to fall as they have.
There is no single “cost” of oil. Oil production costs vary by geography based on the source of oil. Least expensive production tends to be in the Middle Eastern countries with Gulf countries like Saudi Arabia producing from current fields at a marginal cost of less than $3 per barrel. Conversely, production from oil sands can cost in excess of $70 per barrel. Globally, the cost of conventional oil production from producing fields is between $10 and $40 per barrel.