While all the news headlines are focused on the devastating effects of the COVID-19, there are different matters also evolving in the background. The pandemic has created immense load on the health services we had not experienced in recent history, and the wreckage it created in the economy is striking. It would be time to assume that the recovery will take a long time. Managing the crisis on hand is requiring substantial resources from governments, whether it is funding, provision of services, or the enforcement of the quarantine measures. Naturally, some could say that the effective versatility capabilities and responsiveness of governments have been impaired when compared to pre-pandemic times, and this is already creating a gap in other vital areas such as international security.
How does this reflect on our analysis? With regards to the current oil market share rivalry that arose because of the disagreements between Saudi Arabia and Russia, but the United States had made one which will likely hit the U.S. producers hard, numerous calls for a mutual agreement in the OPEC+ pact. While President Trump himself has expressed his displeasure with what OPEC is and potentially keeping the U.S. off of any joint cuts with the OPEC, the future may bring out a new series of failed talks. Given his track record in the trade war with China, we can likely expect President Trump to keep to his words when he says he wants to save the nation’s energy industry. In the event of new talks failing, how might the U.S. try to protect its producers? Tariffs on oil imports are frequently talked about, but for this analysis piece, we’ll focus on a potentially different measure.
Let’s recall the early days of 2020. The contentions between the U.S. and Iran had reached dangerously new levels in the Gulf, and the possibility of a military confrontation was what had dominated the headlines. While the military activity in the region has visibly waned, it probably did not stop. Concerning what we mentioned early on in this piece, the capacity of nations to respond to international matters has possibly diminished. If that is of any indication, then it is likely that numerous proxy organizations in the M.E. could be building up in the fog of the COVID-19 crisis. In recent news pieces I’ve come across, there seem to be good indications of increased military activity in the region, and they included the deployment of advanced defense systems, which does not signal that the perceived threat is solely from proxy organizations by different nations.
What does this have to do with our analysis of the oil market share contentions? The U.S. senators had recently expressed possible measures against Saudi Arabia with differing levels of intensity. One of them included the removal of U.S. forces from the kingdom, but last week I discussed why that would be a bad idea under the current conditions. What could other events trigger and deliver a proper response from the U.S. point of view? In a scenario where the U.S. feels a buildup of hostile forces against its presence in the M.E. (possibly in Iraq), then it may choose to send a message similar to one it did early on in the year. Where might that happen? With regards to the threat posed onto its producers by the current market share rivalry, increasing the tensions right in the Hormuz Strait would allow the U.S. to temporarily halt the international oil shipments flows out of the region, drastically cutting the supplies out of the region.
One-third of the global oil shipments are made out of this region. With the current calculations of the COVID-19’s demand impact being estimated to lead to a slump of around nearly 20 million barrel-per-day in April, this could skyrocket the prices in a short period. The same action would also block a considerable amount of Saudi Arabia’s oil exports, sending a strong message that could force production cuts in the kingdom if the said confrontation prolongs. The so-said intervention by the U.S. does also not have to be a full-scale military action. A heavily localized but accurately conducted intervention at the passageways would be enough to stop the flows out of the region. Given the effects the pandemic has had on funding capabilities of nations, such an event would unlikely spiral out of control and likely remain in the same level of confrontation as the events that unfolded in Iraq.
The reputational harm this may have on the U.S., on the other hand, could be considerable. In this regard, the players in the region need to carefully thread their paths as not to provoke each other into causing the workings of this scenario. Hopefully, things do not evolve into this stage, and an agreement can be made between OPEC+ and the United States. Aggressive regional policies should also not be sought in such drastic times, or the responses by different nations could be unpredictable because of the delicate domestic economic and social balances being heavily shaken in the current times. While this is strongly a low-probability scenario, precedent events have shown us that no event can be considered out of possibility and should be held in regard when making analyses that stem across multiple spectrums, including economy and international security.