“The show is not over yet — Saudi Arabia has come to grips with the war”
Economist Sergey Khestanov on the consequences of Russia's withdrawal from the OPEC agreement
This week, oil is again in the centre of world news, as well as the spread of the coronavirus epidemic in Europe — the price of black gold has fallen below $30 a barrel. In the interview with Realnoe Vremya, economist Sergey Khestanov speaks about whether the current oil situation is causing difficult times for Russia or not.
“If the king of the Saudis decides to 'fight', he has enough resources”
Sergey Alexandrovich, how serious in the foreseeable future can the consequences of the failed deal between OPEC and Russia to extend the reduction in oil production can be for exporting countries and for our country?
It all depends on how long the OPEC-Russia standoff will last. Look, Russia has accumulated a decent amount of gold and foreign exchange reserves, and our finance ministry is bragging that they will last for 6-10 years of the crisis, which is not credible, let's say, but 2-3 years is a more realistic estimate. Why 2-3 years? It is enough to remember how Russian reserves were spent in the crisis of 2008-2009 and in 2015 (then a third of the reserves were spent within six to eight months) to understand that for two years of the country's “life”, the reserve is quite good, and to destroy this stability, it is needed to make some fantastic mistakes.
But what's the catch? The opportunities for Saudi Arabia to escalate the price situation are very large — the operational cost of Saudi oil is much less than $10 a barrel, the country has a convenient geographical location, excellent logistics, and if the king of the Saudis decides to 'fight' to the finish, then he has enough resources, but the fact is that this oil “war” damages everyone — both Saudi Arabia and Russia will suffer from a decline in revenues, and Russia may face particularly difficult times. Therefore, the most profitable and reasonable solution in this situation is to agree and stop this “war”. Predicting subtle psychological nuances — that is, the same decision of the Saudi king — is pointless, so two options are equally possible. First, to agree, and second, it is possible to repeat the situation of 1985-1990, when as a result of the actions of the Saudis, oil prices fell 4 times and remained so for more than 10 years — only after 1998, some growth began. But this option is very painful for Saudi Arabia, and it is unclear whether they will continue to implement it.
Why didn't the parties agree? Is it really about the American shale producers, who allegedly won under the terms of the last deal, and Russia no longer wanted to extend the reduction due to this picture?
It amuses me what the Russian press is reporting about this. I've noticed that a significant part of the federal press in Russia is censored, so I mostly look at what English-language publications report on this topic. The first wave of reports about the failure in the negotiations in both the Russian and foreign press coincided — both wrote that Russia was withdrawing from the OPEC + deal on its own initiative, but suddenly on March 12, reports appeared in the Russian media that Saudi Arabia was allegedly the initiator, and the very fact of such a zigzag in the Russian media hinted that someone who makes such decisions in Russia was seriously scared, and maybe this person will try to somehow win back in the near future.
In principle, if I were asked about what is rational to do in such a situation in the negotiations, I would say that we should bargain, and then make concessions to support ourselves. Look, now Russia is being at the maximum oil production, and our country does not have the technical ability to significantly increase production, and although our Energy Minister Novak boasts that Russia can increase production by 200-300 thousand barrels a day, but compared to our oil exports (5 million 700 thousand barrels a day), this is simply ridiculous and stupid in order to arrange a war — the increase is too small.
In price, Russia has already lost a decent amount — more than 30 per cent, and the show is not over yet — Saudi Arabia has come to grips with the war (they even give a discount on oil), although the Saudi and Russian grades of oil are very well matched. But American shale producers are not suffering from this war at all — they produce a different kind of oil, which is not competitive with either our or Saudi: in Russia, heavy grades of oil are produced, and in the United States, both shale producers and other oil producers produce light, low-sulphur oil, and competition is simply impossible here! Yes, American oil is well suited for the production of gasoline, but it is not suitable for the production of fuel oil, so the tales about the Americans are some element of propaganda: for the full benefit of the United States from oil, there are simply no technical capabilities.
The opportunities for Saudi Arabia to escalate the price situation are very large — the operational cost of Saudi oil is much less than $10 a barrel, the country has a convenient geographical location, excellent logistics, and if the king of the Saudis decides to 'fight' to the finish, then he has enough resources, but the fact is that this oil “war” damages everyone — both Saudi Arabia and Russia will suffer from a decline in revenues, and Russia may face particularly difficult times
“The coronavirus has only worsened the situation in the oil market”
Has the coronavirus affected the price of oil much?
No coronavirus has affected this, and it can't! The coronavirus has three different types of impact on the economy — the first is the disease of people, and it is negligible, and now 50 times fewer people have died from the coronavirus than people are struck by cars every day. Have you seen a lot of people who get hysterical at the sight of a car and demand it to be banned? I have never seen such a car, although the car is 50 times more deadly!
The second type of impact of the virus is quarantine measures, and here everything is more serious: from 0,4 to 1 per cent of GDP, the same China has definitely lost on coronavirus, and нes, this is a lot for a large economy, but it is not a disaster — it is a medium-scale nuisance.
And finally, the third type of influence of the coronavirus is panic, and here in terms of influence on the exchange, the coronavirus has shown itself, and the show continues. The thing is that the dynamics of this virus is similar to the dynamics of the spread of other diseases of this type, and since there is now data on the dynamics of the coronavirus in China, we can safely assume that a couple of months of increasing hysteria in Europe and America awaits us, and then a couple of months of decline in hysteria, until everything comes to nothing. Therefore, the main events with bans, panic, and exchanges are still ahead.
It is encouraging that the virus does not like heat — it does not like when the temperature is above 27-28 degrees, and there is hope that spring and summer will bring down the epidemic. But the scale of the epidemic for Europe and America will be more noticeable than in China, where the quarantine regime for people was stricter — human rights are not particularly respected in China.
The coronavirus has just worsened the situation in the oil market, and the disease itself is unable to create economic problems. To call a spade a spade, the Saudis' decision to lower prices has been provoked by Russia's actions — the Saudis saw that economic activity was falling due to the coronavirus and offered to once again cut production by one and a half million barrels for all oil — exporting countries. For everyone! And what — is it really so hard for all countries to tighten and reduce production? No, of course not. It was much easier to agree, because the Saudis asked us to reduce production by only 200-300 thousand barrels a day, and the Saudis were ready to take on most of the production cuts, which they had done before, and by the way, they always exceeded their obligations — they cut a little more than they promised. The situation is idiotic, and we do not yet know the full reaction of the Saudis, for example. But the coronavirus played only an indirect role here — yes, it reduced the demand for oil in the entire world economy, but it did not reduce it so terribly — even the Chinese data I mentioned on the fall in GDP show that a decline of even 1 per cent can not be called something terrible, especially against the background of Chinese GDP growth of 5-6 per cent in recent years.
The dynamics of this virus is similar to the dynamics of the spread of other diseases of this type, and since there is now data on the dynamics of the coronavirus in China, we can safely assume that a couple of months of increasing hysteria in Europe and America awaits us, and then a couple of months of decline in hysteria, until everything comes to nothing
“Any attempts to hold on will lead to the devaluation of the ruble”
Are the chances of Russia and Saudi Arabia reaching an agreement high?
Here we are already facing pure politics, not economics, plus pure psychology — do not forget that the head of our country has a rather specific character, and the Saudis do not suffer particularly from humanism and tolerance: a journalist (Jamal Khashoggi — editor's note) was lured to the embassy and sawed into pieces.
You have already heard that there is a possibility that the Saudis are ready to sell oil for $25 in the near future. What is the dangerous price of oil for Russia — $20 per barrel, $15?
It all depends on the validity of this price! For a short time, even the price of oil at zero is not dangerous for Russia, and if Kudrin is appointed the prime minister at $10 and he cleans everything in the state budget, then we can hold out for five years with a grin, but what will be the price of all this? Any attempts to hold on will lead to the devaluation of the ruble — now the ruble has already fallen, and in two or three months it is likely that inflation will also jump up, and there will be not a 4 per cent inflation. But the longer the term of cheap oil, the more dramatic everything becomes for us — in order for Russia to maintain the current economic situation and not waste its good reserves, it needs an oil price in the region of 42-43 dollars per barrel. Any price below this figure will mean either a noticeable reduction in government spending and a partial weakening of the ruble, or a waste of reserves.
Of course, there is no doubt that oil revenues will be important even in difficult times. What will the state do about oil companies?
No prizes for guessing — it will milk the oilmen. Just now the state is waiting — everything happened in the oil market abruptly, and similar events occur almost every day, and in these conditions, all those who make decisions are banally waiting — they themselves need to understand what is happening. When such people realize that the high price of oil will not return in the near future, then they will begin to act. For example, begin to “cut” the budget, then the same thing the regions will do — yes, it will be easier for Tatarstan in this sense, but nevertheless, it will do it, in addition, the tax pressure will increase as our economy is nearly 70 per cent of the state, all the horde, who works in the public sector, need to be fed, therefore, the tax burden on business will increase and, of course, on oil companies — they have nowhere to go. And Mishustin was appointed as the prime minister for a reason — this is also a sign.
Last week, Estonia announced that the country has entered an economic crisis. Is it too early to talk about the global economy, or is it already time?
To officially declare a crisis, it is necessary that at least one quarter closed in the red, and the official recession would last two quarters. For shale oil markets, the drop should be 30 per cent for the crisis — this is not yet the case, but the picture is very close. From the point of view of the economy as a whole, even the first quarter will not necessarily be in the red — I think there will be fifty-fifty, but that for the most industries in the world there will be a strong decline in economic activity — it no doubt, it is already evident in the transport sector will probably bankrupt, a third of tour operators are already seeing the difficulties for retailers — people in the stores are getting fewer.
I am not sure that Europe and America will be able to repeat such a success of China — the Chinese in the fight against the epidemic acted by brute force, very harshly, because they quarantined armoured personnel carriers with machine guns, but in a European country no one will dare to do this, so there is no optimism
Does it inspire economic optimism that China has passed the peak of the epidemic?
I am not sure that Europe and America will be able to repeat such a success of China — the Chinese in the fight against the epidemic acted by brute force, very harshly, because they quarantined armoured personnel carriers with machine guns, but in a European country no one will dare to do this, so there is no optimism.