*Author Rahmi Kopar holds a Ph.D. from the Center for Energy, Petroleum and Mineral Law and Policy, Unversity of Dundee and an LLM from the University of Vienna.
The oil price plunge… Bad for Saudi Arabia, Russia, U.S. shale producers, Iran, and bad for any other oil-producing countries and oil-dependent economies one can think of. But which country is it good for? This rare situation gives unfortunate resource-poor, energy importer countries a lucky break.
As of March 27, the price of Brent Crude averaged around US$25-26 per barrel while West Texas Instrument stood at around $21-22 per barrel. The last time markets saw prices this low was in early 2016. To see the larger picture of the current crash, it is important to discuss how the oil market got to this point.
Two key players led the market to its current position today: Russia and Saudi Arabia. Russia, to gain the market share that it had lost to U.S. shale producers, has been in pursuit of a price level that is enough for it to profit but impossible for U.S. shale producers to survive. This can be considered the main motive as to why Russia once again rejected OPEC’s proposal at the OPEC+ meeting on March 6 to curb its oil output to eventually keep prices balanced at a relatively high level and minimize the adverse effects of falling demand due to the coronavirus pandemic.
Had OPEC decided to curb oil production without Russia’s participation, then Russia would have killed two birds with one stone: by ensuring that prices stabilized and by allowing its production levels to remain unchanged. However, now we are witnessing an oil price nosedive thanks to Saudi Arabia’s retaliation for Russia’s rejection through Saudi Arabia’s output increase at lower sales prices.
It was Russia that first created this rift, but it is Saudi Arabia that has taken it to another level. The question, however, is which country will put an end to this price and market share war. This level of low prices is hitting Saudi Arabia’s partners in OPEC hard, with the possibility of U.S shale producers going bankrupt, and it is unknown how long Saudi Arabia or Russia can maintain their economies based on such low oil prices. Since it is a lose-lose situation for all oil-producing parties, we should soon expect a compromise to be made to ease the suffering.
Nonetheless, this production hemorrhage is an answer to prayers for consumers that are keen to see a continuance of this current crisis so they can avail of low sales prices. Major oil-importing countries such as China and India are happy since they will be the biggest beneficiaries of this low-price cycle. And undoubtedly, they will attempt to fill up their strategic petroleum reserves.
Turkey is also one of these countries that import much of its energy needs. Turkey paid around $41 billion for energy imports in 2019, which was nearly one-fifth of its total import bill. The average price of Brent crude in 2019 was around $64 per barrel or more than twofold its current price.
The U.S. Energy Information Administration (EIA) published a short-term energy outlook on March 11 and estimated that the average Brent crude oil price would be $43 in 2020. However, this was forecast when the price averaged $35 and within the last two weeks, it has gone further down. So, it is likely that this forecast will be revised down in the following months, but based on an average of $43 a barrel Turkey will still see a huge drop in its energy bill.
In conjunction with the direct effect of low crude prices, Turkey will also gain in cheaper gas imports since most of the long-term gas contracts are oil-price indexed. The amount that Turkey will pay for its gas consumption will also decrease although not in the short term.
Falling energy prices mean a smaller budget deficit, cheaper end-user energy bills, reduced inflation, lower interest rates, and more competitive production costs for businesses, which altogether will lead to a boost in economic growth.
The coronavirus outbreak will surely hit and badly harm the Turkish economy. However, the positive effect of plunging oil prices will hopefully alleviate this damage.
Even though the continuation of the status quo is positively affecting Turkey, the consensus among energy experts and professionals is that this will not last for long. Ultimately, Russia and Saudi Arabia will come to terms either voluntarily or under pressure from external factors. Until then, Turkey, like other oil-importing countries, will try to turn this global oil crisis into an opportunity to get the most out of it.
*Opinions expressed in this article are the author’s own and do not necessarily reflect the editorial policy of Anadolu Agency.