Shehab Al Makahleh
The world is approaching a huge financial crisis. The most important feature of the crisis is stagnation. Such recession will require no more oil production, as what is produced worldwide of various commodities is in decline. Thus, as oil supplies are increasing with less demand on hydrocarbon products, this would yield to forcing oil prices to plummet, setting up new cartels between Russia, the US and Saudi Arabia, as the three major oil producers.
The oil market is encountering a critical time, as oil cannot easily find a price floor to adjust, justifying the high volatility and rapid decline in prices because supply exceeds demand and real consumption. On the other hand, China, which oil producers have been counting on as the biggest consumer of oil as its economy has been growing rapidly with higher ratios for the past 20 years, will experience a marked economic growth crisis, further decreasing demand this year. The World Bank said in a recent report that China’s economic growth is likely to slow down to 6.2 per cent in 2019 from the previously expected 6.5 per cent, the weakest in 28 years.
The average price of the world’s benchmark Brent crude oil is $69.1 per barrel in 2019, a big drop from previous forecasts. The global economy is suffering from a “gradual slow-down”, according to the Organisation for Economic Cooperation and Development (OECD), which said trade tensions and higher interest rates were decelerating world growth, while the OECD cut its forecast for next year from 3.7 per cent this year to 3.5 per cent. In 2019 and 2020, any broad trade war is expected to lead to economic uncertainty that could result in a loss of up to 0.8 per cent of global GDP by 2021. This uncertainty will not help oil prices, especially as the US economy is at the heart of current tensions.
This comes as the International Energy Agency (IEA) expects global oil supplies to exceed demand in 2019, while a relentless increase in production will overshadow consumption growth.
US crude oil production reached 11 million barrels per day (bpd) since July 2018 for the first time in the country’s history. This production positions the US as the world’s second-largest producer of crude oil, slightly behind Russia, which produced 11.2 million bpd in early July 2018.The markets are no longer affected by the Organisation of the Petroleum Exporting Countries (OPEC) news as the organisation will be unable to move quickly enough to offset the expected slowdown in demand. OPEC’s decisions are no longer a major oil market engine. This has been clear after the emergence of the 2016 Saudi-Russian accord to reduce production, which was considered an alternative alliance to OPEC. The September accord, which is deemed as a renewal to the previous one between Moscow and Riyadh, gives an impression that a new alliance is being formulated.
Any OPEC decision will not affect the prices due to the burr in the oil market worldwide because the hydrocarbon market is entering an unprecedented era of uncertainty due to geopolitical instability and the fragility of the global economy. Thus, the withdrawal of Qatar from the organisation would be a prelude to other countries to follow.
Therefore, the market is in the process of new alliances that may change the hydrocarbon production equation, not only due to Saudi-Russian alliance, but also due to another party; the US, which would join them as a major oil producer whose production would exceed 12.3 million bpd. The tripartite cartel would change the oil price game from now on.
The IEA estimates that the US will lead oil production growth in 2019, with expectations that the US production of crude is expected to average 12.06 million bpd in 2019, the highest level ever in American history, surpassing Russia and Saudi Arabia. However, the American crisis does not lie in oil production but in exports, as Washington will strive to keep prices below $70 per barrel to control inflation and affect necessary economic growth. Once the US produces more oil, this would attract China to buy American oil to replace Russian and Saudi oil, in order to maintain Sino-American ties and reduce trade war.
Currently, China is the largest buyer of US crude oil, India is second and South Korea third. The world oil map and alliances will change according to American oil production, influencing world geopolitics. The continued role of oil in the global economy is only one of the reasons why the United States is not moving away from the Middle East, which is a source of the instability that has repeatedly left its effects on the US.
Thus, once the US depends less on imported oil products from other countries, mainly from the Middle East, the more independent Washington will be to divert its attention to other countries and regions, mainly the Pacific. US oil production will increase to 17 million bpd by the end of the next decade, accounting for about 25 per cent of total non-OPEC supplies.
The writer is a consultant, senior political and media adviser and the executive director of Geostrategic Media Centre-USA. He contributed this article to The Jordan Times