Faced with an escalating crisis brought on by the global outbreak of COVID-19, Saudi Arabia made a conscious decision to increase oil production in order to avert a potential oil-price collapse. The move sent an already faltering global economy into a tailspin.
The trouble began at the beginning of March, after Russia rejected an ultimatum from Saudi Arabia to cut oil production in light of falling prices. The Saudi response was to effectively flood the oil market with an additional 2.6 million barrels a day at a dramatically discounted price.
History has taught us that the Saudi response has been a common experience. Between 1981 and 1985, the Kingdom cut oil production drastically in light of rising supply from the North Sea, Siberia and Mexico. When the move amounted to little benefit, Saudi Arabia slashed their prices and increased production. It did the same in November 2014 after asking Russia to cut oil production, leading to yet another depression in the oil industry. At the time, Saudi Arabia’s deputy economic minister said “if we don’t take any reform measures, and if the global economy stays the same, then we’re doomed to bankruptcy in three to four years.” The statement was a telling indication that the Saudi leadership was well aware of the devastating consequences of such a strategy.
Oil markets have faced rising and falling prices since the start of 2020. In fact, days after the new year began, oil prices dipped sharply and then rose after the United States assassinated Iranian General Qasem Soleimani, bringing the world to the brink of a major war. This was always going to be short-lived however, in light of the long-term impacts of the COVID-19 crisis.
“Price action in the oil market is testament to some of the challenges we face,” economist Cameron Bagrie told MintPress News via email.
The oil industry is obviously facing a demand shock and is in trend decline. But the responses are testament to that old adage: where push comes to shove it’s ‘every man (or woman) for themselves.’”
We need group interest as opposed to self-interest around the globe in response to rising economic and health challenges.”