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G20 energy ministers have agreed to hold an emergency meeting on Friday to discuss global collaboration with OPEC+ oil production cuts. Boosting the price of crude is an economic imperative for members such as Saudi Arabia and Russia, but the majority of the group of major economies arguably have more to lose supporting any action by the cartel.
At least 12 of its members led by China and India — both accounting for the largest share of demand growth prior to the spread of the coronavirus pandemic — are net oil and gas importers. Japan is entirely dependent on foreign imports, predominantly from the Middle East’s petrodollar states. The same goes for South Korea.
The EU has little to gain from supporting Russia’s economy, or the aims of President Vladimir Putin. Norway — Europe’s largest producer — has indicated it would be willing to cut production but it isn’t part of the 27-member bloc, or the G20.
Even the UK — which still produces about 1 million b/d of petroleum products from its North Sea territory and counts BP and Shell among its biggest listed companies — would find it politically difficult to support output cuts that would potentially pump up fuel prices at a time of profound economic anxiety and distress. Britain became a net importer of crude in 2005.
In France, fuel-price riots last year after the government raised taxes on diesel prompted national uproar and the shutdown of Paris. Would President Emmanuel Macron want to support the actions of petrodollar states when his own energy policies are among the most aggressive in promoting the energy transition away from fossil fuels? Chancellor Angela Merkel also wants Germany to reduce its use of oil, but the world’s third-largest economy and Europe’s largest manufacturer needs trade with the Middle East’s rich oil-producing states.
Meanwhile, poorer G20 states such as South Africa and Argentina need lower oil prices to support their economies. Turkey — which imports over half the oil it consumes — has nothing to gain from supporting Saudi Arabia and Russia, two of Recep Erdogan’s main foreign policy adversaries in the Middle East.
TRUMP AND BIROL
The US — the world’s largest economy and G20 heavyweight — is conflicted. President Donald Trump was the first to publicly float the idea on Twitter of a coordinated global cut of between 10 million-15 million b/d. After all, higher prices would help prevent marginal producers in Texas from filing for bankruptcy. Trump has found an unlikely ally in the form of the International Energy Agency’s head, Fatih Birol, who wants the G20 to help protect the energy industry at the expense of the free market.
However, America’s super majors, led by ExxonMobil and Chevron, don’t appear to support the idea of being forced by the federal government to reduce their output in any way. Supporting any action that could push up gasoline prices in an election year could also backfire on Trump at a time when Americans are bearing the brunt of the pandemic.
Until recently, Trump was describing low oil prices as the biggest tax cut ever for average Americans and there are other levers he could pull to put pressure on Riyadh, such as cutting off military aid.
Saudi Arabia — the current revolving leader of the G20 — denies starting the price war. The kingdom has cranked up production to well over 12 million b/d and chartered a fleet of supertankers to store even more oil. Riyadh’s actions to flood the market when demand has collapsed have led to a 70% fall in the price of Platts Dated Brent over the last month.
However, Riyadh accuses its G20 and OPEC+ partner Russia of walking away from talks in March and triggering the current crisis in oil markets. The Kremlin has rejected the accusation, but has also signaled it wants a deal if other major producers such as Mexico and Canada — both G20 members — participate.
Of G20 nations, it is Saudi Arabia and Russia that both have the most to gain from global cuts.
Saudi needs oil trading above $80/b to balance its budget and has already imposed austerity measures. Not even Russia can sustain prices below $30/b for long, even with its flexible exchange rate and more diverse economic base.
Despite their differences, both have an interest in seeing US shale produces permanently put out of business. International cooperation could offer either a way out of their ruinous price situation without losing face. But for the majority of the G20 nations, politically collaborating with OPEC+ to ultimately pump up oil prices for consumers has more risks than benefits.
