The COVID-19 pandemic has upended the global economy. And no other industry has experienced such a near collapse and spectacular recovery within twenty months as has the oil sector. Stuck with low oil prices since 2014, the petroleum industry’s steady gains melted away virtually overnight in April 2020 when demand and prices collapsed, and entire countries shut down to control the spread of the pandemic.
For the first time in history, the price of West Texas Intermediate, the main benchmark for North American crude oil, dropped nearly 300 percent and traded at a negative $37.63 per barrel in April 2020. In other words, producers paid buyers to take their crude because they had no place to store it.
In April 2020, producers paid buyers to take their crude because they had no place to store it.
The rapid fall of oil prices gutted the economies of petrostates in the Arabian Gulf. They struggled with the double whammy of a severe budget shortfall and a raging virus that nobody was equipped to handle at that time. More borrowing to offset the ballooning public deficit seemed to point to inevitable economic austerity measures, implementation of which would further suppress economic growth in the Gulf countries.
In 2020, Saudi Arabia planned to reduce its public spending by more than seven percent in 2021 because it struggled to contain the ballooning deficit. Bahrain’s debt jumped up to 133 percent of the gross domestic product in 2020 from 102 percent a year earlier. During the last twenty months, Kuwait’s budget deficit has reached the highest level in the country’s history. Similarly, Oman’s debt problem went from bad to worse.
By the third quarter of 2021, the sense of desperation over the weak oil demand and debt crises across the Gulf region diminished as prices began to recover. Thanks to the increased distribution of vaccines against COVD-19, pandemic-driven restrictions have eased. The world’s demand for oil has started to rise again. Manufacturing is slowly re-starting. Air travel has resumed (although curtailed somewhat by bans after the advent of the Omicron variant in November). Driving and traffic jams have returned, and prices at the gas pump in the U.S. have posted the highest prices since 2014.
The glut of 2020 has given way to a growing shortage of oil that drove up the price of Brent Crude—one of the world’s most important benchmarks—to $83.54 per barrel in October 2021. There is concern now that the price per barrel may increase further if production does not keep pace with demand.
Why OPEC Is in No Rush to Pump More
Due to the low oil inventory and high prices, producers are raking in more cash now than they have done since 2014. The Organization of the Petroleum Exporting Countries (OPEC) is now optimistic about healthy revenues to the point that it is refusing to increase production despite the explosive growth in demand. The 14 OPEC members include Algeria, Angola, Equatorial Guinea, Gabon, Iran, Iraq, Kuwait, Libya, Nigeria, the Republic of the Congo, Saudi Arabia, the United Arab Emirates (UAE), and Venezuela.
Due to the low oil inventory and high prices, producers are raking in more cash now than they have done since 2014.
Saudi Arabia and the UAE, OPEC’s major oil producers, are expecting a budget surplus as prices continue to improve. Iraq, which has suffered from an acute economic crisis due to low prices, social instability, and political turmoil for years, has also enjoyed a budget surplus this year. OPEC refused to pump more oil even after President Joe Biden made a personal plea to the organization to increase its output in November.
The oil cartel’s decision to limit output has an economic and political rationale—and the two do not seem to be mutually exclusive.
First, OPEC argues that it takes time and money for the oil sector to catch up with demand. Oil production requires massive investments, which had dried up during much of 2020. According to S&P Global Platts Analytics, capital expenditures in exploration and production would increase eight percent, or up to $392 billion, in 2021 after the pandemic had led to a nearly 25 percent decline in investments the year before.
Having suffered the price shock of 2020, OPEC wants to see an even better demand recovery and higher prices to justify more investments in oil exploration and production. The organization believes that a gradual increase in output is healthier for the energy market than a sudden spike. Energy experts correctly predicted that the cartel’s meeting on December 2 —still in session— will result in only a paltry production increase despite the strong demand.
Second, OPEC’s foot-dragging to increase output seems to be driven by Saudi Arabia’s desire to use its oil pricing power to gain access to U.S. political and military support to further project its clout in the Middle East. As a swing producer, Saudi Arabia commands a strong influence on OPEC’s decisions.
Crown Prince Mohammed bin Salman yearns to re-gain respect and political capital in the West, especially in the U.S.
Crown Prince Mohammed bin Salman (MbS), Saudi Arabia’s de facto leader, yearns to re-gain respect and political capital in the West, especially in the U.S., after the fallout in bilateral relations over the 2018 brutal murder of Saudi journalist and Virginia resident Jamal Khashoggi. The CIA pinned the responsibility for his death on MbS. Western governments, including the U.S., imposed targeted sanctions on more than a dozen Saudi nationals over Khashoggi’s murder.
Hydrocarbons Are the New Green
As OPEC members are poised to reap the benefits of rising oil prices, they are not entirely tone-deaf to the increasingly loud calls around the world for a fossil-fuel-free future due to the worsening climate crisis. Rising concentrations of carbon in the atmosphere are warming the planet and ramping up the intensity and frequency of droughts, floods, tornadoes, hurricanes, and other extreme weather events.
Calls for decarbonization at the 2021 United Nations Climate Change Conference, more commonly known as the Conference of Parties (COP), in Glasgow, were never more urgent. More and more countries are making pledges to phase out oil, gas, and coal within the next two decades and move toward renewable energy sources.
In that context, Middle Eastern producers are also contemplating how their oil-dependent economies will fare as the world looks for alternatives to fossil fuels. Ironically, continued oil reliance will be important for oil-exporting states to fund their fossil-fuel-free future.
Producers are contemplating how their oil-dependent economies will fare as the world looks for alternatives to fossil fuels.
In October, the UAE and Saudi Arabia pledged to implement a net-zero strategy by 2050 and 2060, respectively. But soon after the announcement, the head of UAE’s Abu Dhabi National Oil Company, Sultan Ahmed Al Jaber, called for a $600 billion yearly investment in the oil and gas sector by 2030. The irony was not lost on the fact that Al Jaber is also the UAE’s climate envoy responsible for the energy transition of his country.
Similarly, Saudi Arabia sees its immediate future closely tied to oil. The Kingdom wants to raise enough revenue to fund the deployment of carbon capture technologies so it can continue extracting and profiting from oil. MbS considers oil rents as the means to “survive the energy transition,” according to Jim Krane of Rice University.
As part of his Vision 2030 strategy, MbS wants to use the oil revenue to eventually diversify the country’s economy and pivot it from a petrostate to a regional hub focused on technological innovation, including the development of clean and renewable energy.
The world’s fourth-largest natural gas producer, second-largest global exporter of liquefied natural gas, and a former member of OPEC, Qatar has made a modest goal to reduce its greenhouse gas emissions by 25 percent by 2030. Qatar has criticized the vague net-zero commitments of other countries, hinting at greenwashing by some of the world’s major fossil fuel producers. Greenwashing is an effort to give a false impression of being environmentally sustainable.
But the criticism has not stopped Doha from greenwashing natural gas by insisting that it must be an essential part of the energy mix for meeting carbon net-zero goals. The burning of natural gas releases potent greenhouse gases, such as carbon dioxide and methane, that contribute to global warming.
To calibrate itself as less pro-fossil fuel, the state-run oil and gas company Qatar Petroleum changed its name to Qatar Energy this October. But Qatar Energy is the same fossil fuel producer as it was before, and it will remain so. The only difference is that it now plans to use more carbon-capturing and energy efficiency technologies in its operations.
Oil and gas producers in the Gulf feel vindicated by the fact that their products remain important to the world economy.
As the world slowly reemerges from social restrictions imposed by the COVID-19 pandemic, energy demand is bound to rise further. The current high gasoline prices at the pump, projected high costs of heating this winter, and hikes in electricity rates show that the world’s hunger for energy surpasses the current capacity of renewable energy sources to meet its needs. At present, oil and gas producers in the Arabian Gulf feel vindicated by the fact that their energy products remain important to the world economy.
But the widespread wildfires and severe droughts in the American West and across the Middle East, more powerful and frequent hurricanes and tornados, and unprecedented flooding in Western Europe of the past two years have raised the urgency to overhaul the world’s fossil fuel-based energy system or face more catastrophic climate consequences in less than a decade. Unfortunately, no country in the world seems to be ready to act on this urgency by giving up fossil fuels any time soon.