In the face of dual crises
G7 Summit

In the face of dual crises

Guy Caruso, senior adviser, Energy Security and Climate Change Program, Center for Strategic and International Studies, shares with editor John Kirton measures the G7 should take to enhance energy security in the face of the COVID crisis and the Russia-Saudi oil price tensions

How much of a threat was the Russia-Saudi oil price battle posing to energy security?

For the United States, lower oil prices are like a tax cut. All other things being equal, they are relatively good for the US economy but bad for the oil and gas sector. But they are causing instability in the global marketplace. Importantly, the oil price battle puts pressure on countries we do not want to see destabilised – Saudi Arabia, Iraq and, probably, Russia.

The other G7 members except for Canada are largely oil net importers, so the cost of oil and gas imports will come down dramatically. But the great elephant in the room is the lack of demand because of the coronavirus, given that we had recessions in all G7 countries for the first two quarters of 2020. So a boost from lower energy prices is a relatively small benefit compared to the substantial negative gross domestic product for the first half of 2020.

How long will the tensions between Russia and Saudi Arabia go on?

On 13 April the members of the Organization of the Petroleum Exporting Countries plus Russia and several others agreed to cut production by about 10 million barrels per day, beginning in May 2020. Even with that large production cutback, the global market will remain weak. The market instability and lack of revenue, and the continued downward pressure on demand, will continue. This indicates political instability in countries heavily dependent on oil revenues. The US domestic oil industry will have serious problems, which will lead to many small, independent oil companies merging or being acquired.

How is the energy security of the United States and its G7 partners affected by COVID-19?

The biggest impact will be a reduction in consumer purchases, and the second will be a decline in trade. There will be a fairly steep recession. So there will be enormous job losses, enormous reduction in cross-border trade certainly with the United States and Canada, and also a big reduction in demand for Chinese goods and services. One can add bankruptcy to the mergers and acquisitions.

In the United States, monetary measures are probably the easiest policy response but will have the least effect. The key will be how much support there is for following through on the stimulus package, and how well it can support keeping people employed and small businesses operating. But the danger is a very deep recession and how long it takes to turn the impacts of the virus around.

In the medium term will there be a supply shortage, with a subsequent shock and price spike as we’ve seen before?

There is a real potential for a boom and bust again. If we bottom out around $20 per barrel in 2020 and get a U-shaped economic recovery, demand should come back by early 2021. But we will probably have a longer-term impact of two or three years, because reduced investments in big projects and some of the shale and light tight oil investments mean a delay, and will lead to bankruptcies, mergers and acquisitions. We should see a gradual recovery in one or two years, but oil sands projects will take longer because of the longer lead time than the light tight oil, which has a relatively quick, short investment cycle. Companies that were hedged might be able to stave it off for 30 or 90 days, but most are not hedged beyond this. You will see an immediate lack of investments in drilling and US light tight oil production will fall dramatically beginning in mid 2020. Then, depending on whether it is a six-month slowdown or a quicker recovery, prices might go back up to $40 or $50 by the first quarter of 2021. The biggest problem is the next 12 to 18 months.

What should the G7 do to enhance energy security in the face of the double threat of the COVID-19 crisis and the Russian-Saudi oil price war?

G7 members need to do something as a group to deal with the virus both medically, which is happening, but, more importantly, given the G7’s role, to cooperate economically. We are all in this together, both medically and economically. We need to boost liquidity and reaffirm the principles of energy security, which have been discussed in many G7 meetings over the years. We have plenty of oil – the problem is lack of demand. The main way to turn that around is to improve economic growth, which would add to the demand for energy.