The word “war” is unquestionably often misused. Recently French President Macron spoke about a war against the new coronavirus. At the same time, the media report on a new oil war. A better expression to describe the conflict about the oil price and the oil supply would be to speak about a crash in oil prices. But “oil war” sounds more exciting. Irrespective of the words used, the conflict between Saudi Arabia and Russia concerning the oil price has global consequences.
It was in Vienna at a meeting of OPEC plus — meaning OPEC and Russia — that the conflict started. Saudi Arabia wanted to cut the oil supply to keep prices at a higher level. But Russia refused to agree to this supply reduction. Already for some time, the growth of American shale oil production has disturbed Russia. And then came the unilateral sanctions against the NordStream pipeline, which will bring hydrocarbons to Western Europe. One can argue against the bypassing of Ukraine via this new connection between the EU — predominantly Germany — and Russia. As such, the pipeline weakens the transit position of Ukraine. But American opposition to NordStream is mainly motivated by US domestic political interests — not least in promoting shale oil extraction and supplies from the US.
This unilateral move by American President Trump annoyed Russia. By Russia’s decision to force oil prices down and even increase its oil production, the fracking industry in the US has been severely damaged. Given their current profits, the shale industry requires a price around $50 per barrel. The present price level of $30 is far too low — at least in the long run. Already the industry is demanding help and financial support from Trump. Necessarily, all oil-producing countries will bear a heavy burden from the low oil prices. But Russia has relatively high financial reserves — at least more than the other primary oil producer and its competitor, Saudi Arabia.
But even while Russia is less affected by the low oil prices, it has fewer resources to finance investments that would promote Russian economic growth and the well-being of its citizens. As the Financial Times recently wrote: ” ....low oil prices, on top of the impact of coronavirus, will make it more difficult to deliver on Mr.Putin’s promises to rekindle stalled growth through “national projects” involving heavy public spending.” And also the recent economic forecast by the Vienna Institute for International Economics (WIIW) foresees a reduction in many Russian investments.
Strong negative effects will also be felt in some African countries, including Nigeria and Angola. The same is true for Latin America, especially for Venezuela and Ecuador. Already with higher oil prices, they are stuck in a very difficult economic situation. And of course there will also be a negative impact on the necessary transition to renewable energy. As the Financial Times made it clear: ”Cheap petrol poses risk for electric vehicles and the appeal of energy efficiency measures.” The only positive side is that for poorer, non-oil-exporting countries, low oil prices are a relief and, with our current economic problems due to the coronavirus, the low oil prices may help to mitigate some of the negative effects.
The real disaster is the extreme nationalism and the lack of cooperation between the big powers. First Trump, with his crazy “America first” attitude, increased sanctions against Russia because of the NordStream pipeline. Then, Russia sought destroy or at least weaken the US shale oil industry. But that is not so sure. As the Israeli Institute for National Security Studies (INSS) wrote in a recent analysis: “ ...the sector is too important for the United States to allow it to collapse. Even if companies do go bankrupt, this will only serve to improve the competitiveness of the American energy giants.”
Both Trump and Putin — and of course also the Saudis — have no great sympathy, to say the least, for the obligation to increase the production and use of alternative energies. Lower oil prices result in short-term benefits for drivers of traditional cars and the industries that rely on oil. But what the global economy and a progressive climate policy would need is stability and global cooperation for a transformation into a more sustainable economic and ecological system. All these power games may result in short-term benefits to one or the other player. But our world, which is in a very fragile situation, needs forward-looking leaders.
Dr. Hannes Swoboda, President of the International Institute for Peace (IP), started his career in urban politics in Vienna and was elected member of the European Parliament in 1996. He was Vice President of the Social Democrat Group until 2012 und then President until 2014. He was particularly engaged in foreign, enlargement, and neighborhood policies. Swoboda is also President of the Vienna Institute for International Economics, the Centre of Architecture, the University for Applied Science - Campus Vienna, and the Sir Peter Ustinov Institute.