It is common knowledge that oil, also known as black gold, has been the driving force of economic and international affairs for the past century. This precious commodity has led to conflicts, created economic coalitions like The Organization of Petroleum Exporting Countries (OPEC) and shaped our current political landscape. While people have fought over oil for decades, what happens when the price of U.S. oil falls to below zero, and how did this happen?
The price of oil had already been on a downturn before the advent of COVID-19, which caused the price to drop negative for the first time. This was due to OPEC’s centralization of the oil trade. While the U.S. has the world’s largest supply of recoverable oil reserves, much of these are used domestically and additional oil is imported to meet demand. This is why OPEC mediates approximately 60% of global petroleum export. The impact of this near monopoly-like coalition has resulted in unhealthy price control. On Oct. 2, 2017, Neanda Salvaterra and Alison Sider of the Wall Street Journal identified two main causes of the oil crisis. They cited supply saturation in the market and a series of misguided bureaucratic decisions by OPEC that were made to ensure that the weak links of the alliance remained economically solvent. Several OPEC nations were allowed to forgo supply cut regulations for domestic reasons, overriding the multilateral priorities of OPEC and the success of the oil market. There is no definitive administrative center within OPEC that oversees the coalition which causes the alliance to be dependent upon the alignment of domestic interests. This incentivized a joint increase in production as oil is the primary source of income for nearly every country in the alliance. The price dropped due to supply outpacing the world demand. This constant price fluctuation has hurt the power of currencies such as the Euro and Riyadh and has shown signs of an alarming downward trend in global oil prices as technology becomes more adept in exploiting vast quantities of remote oil reserves. In February 2016, OPEC stated that they would implement a 700,000 barrel per day supply cut but only Saudi Arabia and a small handful of other nations have complied due to economic dependence on oil in areas such as Libya and Nigeria.
More recently, Russia has been disputing with OPEC over how much oil to produce, as both parties have different interests in the price of oil. OPEC wants to limit production to drive up the price while Russia wants to keep oil production constant as Russia needs the current income even at a reduced price. This caused Saudi Arabia to slash prices and increase production to protect its market share in the global oil trade, causing the oil price to drop by 24%. The political history of OPEC and its economic allies has made the oil market vulnerable to a sudden shift, entering COVID-19.
COVID-19 has effectively shut down the world economy and has created such an excess supply that oil refineries have been forced to pay to clear storage space for recovered oil. Jillian Ambrose of the Guardian made a clear distinction, stating that it is just U.S. oil prices that have hit negative. Many other countries like the United Kingdom still maintain positive oil prices, even if not favorable. Rather than pay people to take oil, it is likely manufacturers shut down until the market restabilizes. While the United States has the ability to take a temporary financial hit due to the current market stagnation, countries who depend on oil as their sole source of revenue can be in real danger. These include nations in the Middle East whose governments are under threat of collapse as a result of social uprising from a lack of economic prosperity. Chris Mathews of the Fortune wrote that “the geopolitical dynamics in the Middle East are so dependent on the business of oil extraction, economics, and terrorism, including the rise of ISIS, may be more connected than they may seem at first blush.” Instability allows extremism to gain a foothold in areas where governments are too weak to ensure proper national security. Therefore, eliminating breeding grounds for terrorist organizations by restabilizing oil-dependent economies should be an international security priority and this starts with managing the domestic American oil supply.
There is a famous phrase: When America sneezes, the world catches a cold. It speaks towards the nation’s prominent position as a leader in economic and political affairs. While the U.S. is not the only big player in the oil economy, its struggles take a toll globally, making it critical to monitor such fluctuations to prevent lasting socioeconomic backlash.
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Karthik Iyer is a campus correspondent for The Daily Campus. He can be reached via email at email@example.com.