COVID-19 Geopolitics and Oil Market “Black Tuesday”: Tendency or Regularity
30 April, 2020
COVID-19 Geopolitics and Oil Market “Black Tuesday”: Tendency or Regularity
Recent “Black Oil Tuesday” has drastically shifted the balance of energy resources deliveries and caused additional landslide of global economic development. The process started with the 10% slump for the UK benchmark for oil to around $16 (£13) a barrel in another day of declines. It comes after the price of West Texas Intermediate (WTI), the benchmark for US oil, fell below zero for the first time since the first and second oil blows in 1973 and 1979 respectively. Hence, the
oil prices slowdown directly has had an impact on and vice versa on global demand in oil consumption.

Another important issue that could cause the oil crisis was Russia’s energy power with a future competitor of the USA, which plays a big role when it opens its reserves that triggered the development of any scenarios in the international oil market. Herewith it is to underscore the importance of categories of oil production market indications that directly have an immediate influence on the crisis eruption. Mainly there are two categories of oil upon to which average international price for a barrel of oil is being defined: WTI – the US mark oil category (700 million barrel untapped reserve) – “heavy” oil casual future deal price stick with a critical margin of $110 and the BRENT - Russian mark oil category, “light” oil casual stock deal price before the oil crisis was critical margin $80-90. The main hint to provoke the “Black Oil Tuesday” has remained in oil trades as so-called "futures contracts" that allow buyers to purchase barrels of oil at a predetermined price for delivery at a predetermined future date. This is a binding agreement that legally requires buyers and sellers to make good on the deal when the contract comes due. The second reason reserved in setting up and reaching the so-called “vertical tied up” agreement in aegis of “OPEC+” international fora. The deal envisaged to cut down pumping up oil till 10 million per barrel day and keeping up the statistics till 2021.

As an additional indirect impact also has been identified in fostering new dimensions of energy security- the discovery of liquefied natural gas - LNG. The LNG introduction and further development contribute to even a long-run period shaping up oil prices stabilization that could be reached out at the end of 2020. The major regional markets are Asia, Europe, North America. The world’s proved natural gas reserves are as large as oil, but they haven’t been developed to the same degree, because of the constraint of over-water transportation. There are some factors to create the global market: first is sheer abundance, second is that the LNG was formerly considered high-priced alternative, but no longer. Costs have come down 30% in the past few years, making it competitive with pipeline gas, another factor is rising demand, and natural gas has become the fuel of choice in electric generation, locking in market growth. To reach traditional elements of energy security it needs to attain the following features:

• Supply sources security,
• Demand center,
• Geopolitics of energy transit deliveries,
• Market structure provisions, like OPEC, EIA, etc.

Having considered other important issues as energy and homeland security political provisions, that countries have many fear of attacks on the energy system by terrorists, cyberwar, or spreading chemical agents.

Due to the “Black Oil Tuesday” effect, there are several main risks and challenges to global energy security, including infrastructure disruption, risks of terrorism and war, supply diversity stability, energy as a geopolitical weapon (gas geo-economics), security margin, security of supplies/price stability, investment regimes sustainability, depriving of getting access to new reserves, security of revenue.

Despite disruption consequences in the oil markets, currently the Brent price hikes up to $20.38 per barrel. Presumably, it occurred since the “Tied Up” Agreement (OPEC+) joined by Saudi Arabia “Saudi Aramco” as well as Nigeria, Algeria, and Kuwait. However, due to the deep crisis, global consumption of oil dropped around 70% (from 100 million barrels per day till 70 million barrels per day). Mainly futures contracts on gasoline dropped down 1.23%. According to Georgian leading expert in energy security studies, Professor Nick Chitadze correctly identified that taking into consideration the energy consequences of the world economic crisis - due to the rapid decrease on the demand for the fuel, especially oil products, from the global economic problems will especially suffer the oil producer states. For example, the budget income of Saudi Arabia for 75% depends on the oil export, concerning Russia, the budget revenues of this country depend on oil export for about 37%.

Having considered the above-mentioned, it could be identified about 16 main factors why the oil prices dropped. The assumption was founded with a “brainstorm” discussion with a young Georgian energy security expert community from two Georgian Universities – International Black Sea University (IBSU) and Georgian National University (SEU) where the subject of energy security is a major one in the curriculum of the educational portfolio. Therefore the main factors could be included the following:

1. Global economic problem – lockdown key transit energy gateways;
2. Limitation of automobile movement and exploitation;
3. Seabed untapped oil resources and problems and limitations with their further development;
4. Limitation of air transportation network;
5. Limitation to access to oil resources by the oil producer countries to the international markets, including strategic reserves;
6. Expectation to rise of future oil prices in international markets and international share exchange bonds;
7. Lockdown potential development of untapped oil reserves;
8. Suspension of oil industrial resources development;
9. The knock-on effect has been a supply glut and a worldwide shortage of storage space for oil and disruption of access to storage hub could be a negative influence on energy security provisions;
10. Rising geostrategic battles over the Arctic oil reserves and even lockdown pumping proceeding of Artic oil due to non-rentability case;
11. Rising potential development of renewable energy resources (solar, biofuel, windy, hydro energy, etc.) in contradiction to non-renewable (fossil fuels) and semi-renewable (nuclear power) resources and increases its volume for global energy consumption;
12. Effect of COVID-19 Geopolitics on global economic development/coronavirus demand hit and buoy prices;
13. Future conflicts, including military ones in the extraction of oil drills, like Syrian case and oil warfare games between Russian and USA militaries;
14. International terrorism threat imposition on the oil industry and its consequences affect in future;
15. In future growing exploitation of oil resources and competition between oil consumers and oil producers and state-run crisis in non-oil producing countries with transit status quo (for example, aggravation of Syrian conflict, escalation military conflict in separatist torn Donbas region in Ukraine, etc.);
16. Deflation of international currencies;
17. Introducing a new type of wargame scenario between oil producer countries that has been already occurred between OPEC member Saudi Arabia and non-OPEC key oil producer Russian Federation.

Dr. Vakhtang Maisaia

Photo: aljazeera.com

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