Coronavirus has taken its latest victim – the world’s largest oil cartel

Since 2009, oil prices started their gradual decline, signalling the end of the fossil fuel era. But it was Covid-19 that eventually destroyed the old world, writes Vladislav Inozemtsev

The discovery of fracking has turned the US into the world's largest oil producer (Getty)

On 9 and 10 April 2020, the energy secretaries of all the largest oil producing and oil consuming nations joined each other at two webinars for debating the future of world energy.

The three months that preceded the meeting were marked by the most fascinating events in global economy. In January the world stock markets navigated uncharted waters, reaching one record high after another. By February, coronavirus paralysed the Chinese economy, before going global. In March, Russia’s breakup with Saudi Arabia sent oil prices to lows not seen since the late 1990s. So the meetings organised under the auspices of Opec+ and the G20 seemed to be very timely.

We now know what was at stake - as well as the outcome of these 20-hour debates between leaders. Formally, the global oil output was cut by 15 million barrels per day in a bold move to balance struggling production with disappearing demand. What still looks more uncertain is the future of the oil industry, since the cut might appear to be insufficient for restoring a perfect market equilibrium. We will see in the coming weeks whether the oil prices stabilise or continue a downward slide.

Should we believe the two debates opened a new chapter in global economic history? That might be the case. But what looks much more certain is that they close another - one that lasted almost 60 years, since the creation of Opec in Baghdad in 1960.

To understand the magnitude of change, there are three important issues to look at. The first, and by far the most important, is the failure of Opec not only as an institution but as a “way of life”.

For several decades, Opec dominated the global energy market, pressing the Western powers and competing with the Soviets. But during all these years, with the exception of the Gulf kingdoms, the majority of its member nations remained poor, however large their petroleum deposits were. From Venezuela to Libya, from Iran to Angola, there was little place for development and democracy.

So it shouldn’t be a surprise to see these countries lagging far and far behind the Western powers: since 1981 the overall distance between the petrostates and the postindustrial world grew larger. From one decade to another, their governments needed ever-higher oil prices to balance their budgets. So, both for the old Opec members and for so-called new petrostates like Russia or Kazakhstan, the only chance for prosperity was to keep prices high. In 2001, the members put aside their former quarrels to orchestrate the first ever deal in what was later called Opec+, then repeated the effort once again in 2016.

For the last two decades of the 20th century, Opec stood alone against both the West and the Soviet Union/Russia. During the first 20 years of the 21st century, it teamed with the post-Soviet nations pretending to be the major energy supplier to both the postindustrial and the industrial world.

Since 2009, oil prices started their gradual decline, signaling the end of the fossil fuel era - but it was the Covid-19 that eventually destroyed the old world.

Recent events are unique. The Saudis and the Russians, facing the crumbling demand, were actually brought together by the Americans - who, in recent years, proved the predominance of world-class technology over natural wealth to become the world’s largest oil producer. Now any cuts in Opec+ production looks insufficient to stabilise the market. Global oil demand will not reach pre-crisis levels anytime soon, and Opec+ is no longer an energy superbloc. Its time is over.

The second important issue is the changing regional balance in global energy flows. During the 1970s and 1980s, Opec nations were supplying almost all Western world with their oil, but everything started to change at millennium’s turn. The rise of Asia captured the attention of both the Gulf countries and Russia, as China made its bid to become the world’s largest industrial powerhouse. By early 2010s China already was the major destination for Saudi and Russian oil exports; it was widely believed its ascent was irreversible.

At the same time a different trend started to develop. The technological innovations that allowed the extraction of oil from the shale structures of Texas in the south of the US, from the oil-bearing sands of Alberta in Canada, and from the deep offshore fields beyond the Brazilian coastline, changed the global energy chessboard. In just 20 years these three nations have emerged as the best market performers, each increasing their output more than twofold while operating at 2.5+ million barrels per day capacity. The US, Canada and Brazil were the crucial members at this month’s G20 negotiations because they eventually created a new global energy reality, effectively cutting Opec+ nations out of the market in the Americas.

With its own growing production and Canada’s backing, the US became energy self-sufficient for the first time since 1950s; Brazil, the largest Latin American economy, is now also independent from outside supply, producing three time more oil than Venezuela that completely dominated the regional supply chain up to 1980s.

The importance of the change that happened during the last two decades was marked not only by the technological superiority of the Americans – the changing regional balances transformed the Opec+ from a club of “energy superpowers” into a regional grouping with its market strictly limited to the Eurasian continent. Without its economic grip over the Americas Opec+ lost its most effective leverage, while the US just increased its influence over Europe, as it looks as the only power able to contain both China and Russia.

As coronavirus spread and the demand for oil collapsed, it became brutally obvious that Opec+ has to compete for Europe and Asia, but has lost the global market.

The third issue is that China is now the world’s eighth largest oil producer and the second largest petroleum consumer, despite the fact is it not - in either a formal or informal way - involved in any of the oil producing or oil consuming blocs.

During the last 20 years, China alone consumed 46 per cent of the global oil production increase, while its imports inflated almost sevenfold between 2000 and 2019. During these years, China was propelled up by its status of the “world’s greatest factory” that supplied both the US and Europe and benefited from incoming foreign investment.

But, once again, coronavirus is shaking the existing global economic order. Western powers might see China as responsible for the greatest economic disaster since the Second World War. They may also come to a rather obvious conclusion that overdependence on China has become too strong to be tolerated.

These fresh economic trends, which might emerge in the post Covid-19 world, are also threatening many of the Opec+ members: Russia, Iran and Saudi Arabia relied on China heavily in recent years, and might be forced to reorient their export trajectories.

Just three months ago everything seemed going well for major Opec+ member states. Crown Prince Mohammad bin Salman of Saudi Arabia nurtured his ambitious modernisation strategy, aimed at transforming the kingdom he prepared to inherit into a modern hi-tech state. President Vladimir Putin of Russia drafted a new constitution that would secure him a sort of life-long rule-making monarchy.

Today these oil producing countries found themselves completely dependent on evaporating demand. They were forced together to end their disputes by their greatest antagonist, and are facing a very uncertain future since none of us can be sure on when, and how, the coronavirus pandemic will end.

Covid-19 has taken more than 100,000 victims globally. We might now need to count Opec among them.

Vladislav Inozemtsev is the director of the Centre for Post-Industrial Studies in Moscow