OPINIONS Oil price war, really two against one

OPINIONS

Oil price war, really two against one

China Daily

08:21, March 16, 2020

Fuel prices are displayed at a Brazilian oil company Petrobras gas station in Rio de Janeiro, Brazil, March 9, 2020. [Photo/Agencies]

Saudi Arabia took the initiative to cut the price of crude oil last week by a large margin.

The turbulence in the oil market will inevitably have far-reaching effects, as oil is a highly sensitive strategic resource.

If the repercussions ripple through geopolitics, no party will be able to guarantee the situation evolves in the desired direction.

Despite their broken negotiations on the oil price, Moscow's studied connivance, if not a tacit agreement, with Riyadh's unexpected move has driven home the point that their common opponent is shale oil from the United States.

That the US has become the largest oil producer in 2018, thanks to the maturing of its shale oil technology since 2011, and has overtaken Saudi Arabia and Russia as the party holding the largest share of the world's oil market, 18 percent, explains the joint move by Saudi Arabia and Russia.

Due to the fall of demand over the past few years, all major oil producers have reduced their output to maintain the price of oil and their profit at the cost of losing market to competitors such as the US. With the US already becoming the largest shareholder of the world market, to bring down the price was the inevitable choice for others to compete with the US.

However, given their economic structure and foundation, neither Saudi Arabia nor Russia can sustain the current low oil price longer than their common rival, even if the fall of the US stock market has given the impression that the US is suffering more.

Oil only accounts for 9 percent of the US' gross domestic product, while it accounts for nearly 70 percent of Saudi Arabia's fiscal revenue and more than 50 percent of Russia's.

So although most of the shale oil companies in the US cannot survive the cut-throat price competition themselves, the US' diversified and competitive economy can help the country win a protracted price war.

As such, the three are destined to strengthen their communications to reach a new balance based on new market landscape shaped by the shale oil from the US so as to put an end to the oil war that leaves no parties unscathed.

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