The executive director of the International Energy Agency (IEA), Fatih Birol, has called on the energy ministers of the world's 20 biggest economies, G20, to take action on behalf of the global oil market to avoid an oil market crash.
Due to the rapid spread of the novel coronavirus (COVID-19), global economic growth and oil demand have remained very low, creating an oil supply glut and pushing crude prices to their lowest levels since 2002.
After failing to make deeper and longer cuts on March 6, Saudi Arabia-led OPEC and Russia-spearheaded non-OPEC oil-producing countries will hold a teleconference on Thursday to curb their total production to trim some of the oversupply in the global oil market. Saudi Arabia also holds the presidency of the G20 this year.
"Developments in the oil market are very worrying. If there is not a serious message from the G20 meeting by the end of Friday, I think oil prices will remain very weak and the downward pressure on prices will continue," Birol told Anadolu Agency in an exclusive teleconference interview.
AA: What is the recent situation in the global oil market in terms of supply and demand as there is a massive decline in global oil demand and crude prices due to COVID-19? What kind of a decision should be taken in the G20 energy ministers' meeting to balance the market?
BIROL: The developments in the oil market are very worrying. There is a huge glut of supply in the global oil market. The first reason for this is the major decline in overall oil demand in the world - 60% of global oil demand comes from the transportation sector and right now around 3.5 billion people are under self-quarantine in their homes, so there is not much transportation worldwide and that's why the demand is falling.
The second reason for oversupply is due to Saudi Arabia and Russia’s decision to boost production levels that will increase supply even more. The oversupply caused a massive decline in crude prices, which are around $30 per barrel right now. If there is no decision from the OPEC+ meeting this week, prices may plummet even further. And, we can see a collapse in countries whose revenues depend on oil and natural gas income. We can see problems in countries like Iraq, Iran, Algeria and Nigeria. Saudi Arabia and Russia, whose financial reserves are stronger, will see the impact in time as well.
My main concern is there are millions of people around the world who work in oil and oil-related sectors. Natural gas and oil industries are also strong pillars for the world economy. If these industries collapse, they will have a negative impact on the global economy as well.
In oil-importing countries such as Turkey, we see some relaxation in pumping prices and that is a positive development in the short term. However, the possibility of oil prices declining to $10-$20 per barrel range would not be good for Turkey since this would create a rupture in the world economy. Weak economies in Turkey's trading partners would also have a negative impact on Turkey's trade and tourism income.
That's why I call on both oil-producing and consuming countries of the G20, the world's largest forum. Saudi Arabia, which holds the presidency of the G20 meeting this year, called all G20 countries, including Turkey's Energy and Natural Resources Minister Fatih Donmez to the meeting. I will make the opening speech. I expect strong collaboration from all countries and for them to work towards preventing the collapse of oil and gas industries, which pose a serious challenge to the world economy."
AA: What is the volume of cuts required in crude production to avoid the collapse of the oil market?
BIROL: Right now, many countries are conducting research on this, which we support. However, even a 10-million-barrel-per-day production cut is not enough to save the market because the glut of supply is very high. That's why higher cuts are needed.
AA: What should Turkey do in light of these events?
BIROL: Pumping prices remaining low is an advantage for Turkey, but since vehicles are not used, it cannot be turned into a much greater advantage. The natural gas market follows the oil market after six months, but Turkey uses much of its natural gas for heating, and the winter season is almost over. A decline in oil prices will have many positive effects in the short term, but in the long run that won't be the case.
AA: How probable is it for oil prices to plummet below $20 per barrel, and how long can prices stay under that level? What will the impact on major oil-producing countries like Saudi Arabia, Russia and the U.S. be?
BIROL: This week is very critical in terms of prices and market dynamics. If G20 countries cannot give a concrete signal to the market by Friday, April 10, then oil prices could go down further.
We cannot compare Iraq, Iran, Nigeria with Saudi Arabia and Russia because the economies of the former are much more dependent on oil and gas revenues. For example, Iraq can only pay half of the salaries of government employees since it is 90% dependent on oil prices. They have a zero budget for other social areas in the country. Thus, oil prices and Covid-19 will affect those countries more than others.
Saudi Arabia and Russia have stronger financial reserves in the short term. They can now postpone a big upheaval, but this does not mean that the recent developments will not impact their economies. Their effects will be seen in the longer term.
AA: Saudi Arabia and Russia want to include the U.S. in their oil production cut decision as well. However, this seems impossible for the U.S. under free market conditions because their oil sector does not have a central authority like Saudi Arabia and Russia. How can the U.S. contribute to OPEC+ production cuts?
BIROL: The oil price drop caused great unemployment in the U.S. in previous years. However, this time the decline in oil prices will not only impact the U.S. but all countries from Africa to Asia and Europe, and all sectors from a worker at a gas station to a CEO at a company. This process will cause millions of people to lose their jobs. There is no question about this. Thus, companies in the free market economies like the U.S., Canada and Brazil are currently decreasing their budgets and production investments an this will bring a cut in production. This could contribute to the efforts of Russia and Saudi Arabia.
Additionally, some efforts to increase consumption could be made. A number of countries have oil stocks and countries like India and China could buy oil and stock it while prices are low. This could be insurance for these countries against higher prices, and it would also increase global oil consumption, which could be a small kiss of life for the markets."
AA: How will energy markets be shaped after Covid-19?
BIROL: A number of countries are preparing stimulus packages against the impacts of Covid-19. These countries should support packages to increase employment, energy efficiency and security. These decisions should accelerate the development of clean energy sources. After Covid-19, the global economy will be transformed and the decisions that countries are willing to take offer opportunities to reconstruct and modernize their energy sectors.
By Ovunc Kutlu and Nuran Erkul Kaya