Dictators, Disease, and Drastic Oil Drops #COVID19

The following post is an exclusive feature from the team at Awari, a company bringing sustainability research to ordinary investors.

While you’ve been reading about coronavirus, or watching the stock market, you might have missed some major economic news hidden in the downturn. Namely, global oil prices have crashed at an astonishing rate; two weeks ago, prices had their biggest one day fall since 1991, which was when the first American bombs hit Iraqi troops during the Gulf War.

However, it’s not just due to the pandemic — prices were driven down by dictators that lead major countries in the oil market. As we dive into the decisions that contributed to the recent downturns in the market, we should consider the following questions:

1. What kind of economic system do we want to see, once we recover from the COVID-19 pandemic?
2. Do we want to continue relying on a fuel source that is environmentally damaging *and* powered by authoritarian governments?

What happened?

Over 50 years ago, many of the world’s major oil-producing nations (largely from the Middle East, Africa and Latin America) formed the Organization of the Petroleum Exporting Countries (OPEC). Notably, the U.S. and Russia, the largest and third-largest producers globally, are not members — although Russia began coordinating production with OPEC after oil crashed in 2016 due to runaway U.S. supply.

OPEC aims to balance supply with demand and maintain a steady oil price that allows all the members to make money. Steady prices help individuals budget for gas, companies estimate costs, and countries set national budgets.

Since coronavirus has shuttered countries, demand for oil has fallen. Two weeks ago, Russia met with Saudia Arabia and other members of OPEC to set prices and ensure they didn’t overproduce.

The meeting did not go well …

Saudi Arabia attempted to intimidate Russia into production cuts, but the Russians walked away. The Saudis threatened to keep production high, and the Russians called their bluff. The result is that no production cuts were put in place — leading to oversupply. This led to oil prices falling from over $50 per barrel to roughly $35.

Saudi Arabia’s de facto leader, Crown Prince Mohammed bin Salman, believes Russia has been cheating on past agreements, and wanted to send a message — but may not have expected the Russians to walk away from negotiations. The Crown Prince has grown increasingly bold since seizing power in the desert kingdom, imprisoning rivals the day before the OPEC meeting and ordering assassinations on foreign soil. The aggressive stance at OPEC was his latest show of force on the global stage, until it backfired.

The resulting oil price collapse added to coronavirus-related losses, as companies and countries struggled to adjust to a new normal. For their part, Russia seems content with lower oil prices, as it shows their independence to the Saudis and hurts U.S. oil producers.

How does this affect us?

In the U.S., lower oil prices do help consumers through lowering gas prices, but have significant downsides in the bigger picture.

1. Prolonged low prices could lead to 50,000 to 70,000 jobs being lost as oil companies cut back to save money.
2. Lower prices may help the consumers wallet, but it sets us back in the fight against climate change, as studies show that lower oil prices lead to higher carbon emissions; with the world approaching crucial thresholds on emissions and temperature, all reductions are critical.

But the biggest impacts may be on the world’s poorest people. Oil is critically important to many developing countries — from those in crisis, like Libya or Venezuela, to highly populous but poor countries such as Nigeria and Indonesia (a combined population of 450 million). Price crashes not only endanger the livelihoods of oil workers directly, but also plunge entire economies into recession.

It’s worth noting that many fragile states are remarkably dependent on oil (considerable economic research suggests that natural resources make countries more fragile). Countries like Iraq, Iran, and Saudi Arabia depend on oil revenues to keep society together, diffusing public anger through payouts and public services. If these are called into question, underlying tensions may increase and lead to broader social unrest.

And critically, oil allows rulers like bin Salman and Russia’s Vladimir Putin to escape accountability. Oil pays for 52% of Russia’s annual budget and 87% of Saudi Arabia’s budget. It funds armies and bribes, leading to entrenched power, and helping leaders avoid answering to the public or the global community. Saudi’s war in Yemen or Russia’s occupation of Ukraine can occur because their leaders hold the keys to this valuable commodity.

You may be part of the solution

As coronavirus forces us to reconsider our economic ties, from supply chains to trade routes, it’s worth asking ourselves — should our global economic system depend on dictators?

The sustainability discussion around oil often centers on the environment. But there’s a critical social sustainability element to oil as well. Building economies less dependent on fossil fuels helps the environment, but it also reduces the leverage of dictators and strongmen. It reduces economic volatility, and lowers the risk that personal arguments end up affecting millions.

Let’s choose to rebuild a more resilient, sustainable economy after coronavirus.

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