By Payman Yazdani & Haniyeh Sadat Jafariyeh

Oil U.S. tool to put pressure on China: energy expert

April 27, 2020 - 15:38

TEHRAN – Monday, April 20 (2020), was a historic day for the oil market. West Texas Intermediate (WTI) closed below zero for the first time in the history of the oil market. President Trump's policies are considered as the main cause of the sharp prices fall and how he is using the factor to put pressure on its major rival, China, however, the fire will damage both producers and consumers in the long run.

Oil prices crashed due to the coronavirus pandemic decreased demand for crude oil but filled the storages both onshore and offshore.

On Sunday, April 24, WTI stands at $16.94 and the prices' have had a journey back from below zero to single-digit and its current figure. 

To know more about the issue Mehr News reached out to Senior Researcher of JIME center, the Institute of Energy Economics of Japan, Daisuke Hine.  

Here is the full text of our interview with him:

What are the reasons behind a sharp decline in oil prices?

Simply, oversupply. OPEC+ decided to reduce their production from May onward, however, there was abundant availability of crudes in the market already and all of the countries are even trying to increase their April production.

On the other hand, whole demand dropped sharply on the background of the stall of social activities lead by the global expansion of COVID19 affection.

Now stockpile level is too high and buyers nor producers cannot keep oil anymore, so the price dropped to negative level but the price level includes the cost of storage (Sellers to pay a storage fee to buyers to continue production).

Reduction of oil price will leave negative effects on the U.S. Shale oil and gas industry because the continuation of extraction of this kind of oil depends on oil price(said to be above 60 $ pb). but on the other hand, other U.S. industries are benefiting from the low oil prices. How will this fact affect the U.S. upcoming election results?

Lower oil cost is necessary for U.S. society enjoyed the benefit came from the differential between imported crude and cheaper shale oil price. Shale producers also enjoyed good sales.
However, if the shale industry collapse by lower profit, the U.S. has to get back to the era that they did not have much production and had to import crude which price was volatile that harmed the economy sometimes.
So, now the oil industry is one of the major keys of Mr. Trump to show his achievements and he has to stabilize it now for the next election.

Saudi decision not to cut its oil output has created a rift between the country and its old ally the U.S. Why does Riyadh oppose the U.S. request?

Saudi considers they are responsible for the industry and the U.S. just enjoys profit from niche areas without any responsibility. Oil is one of the strategic tools for producers, so Saudi doesn’t want to listen to the U.S. with this viewpoint as well.

In the long term, the Persian Gulf literal states whose economies are dependent on oil revenues will suffer from the low price of oil. How will this affect the social and welfare policies of these countries?

As we see, the fiscal balance breakeven is far from the current price. All countries will suffer from low oil prices in terms of that. But now we need to focus on the prevention of COVID19.

Energy has always been a tool in the hands of the U.S. to contain China. From your point of view, will we see a change to U.S. policy towards China in the future?

For the U.S., China is one of the potential buyers of their oil/gas. From the viewpoint of economics, the U.S. needs to take care of China in terms of that. However, now the U.S. administration is trying to accuse China of the pandemic and the energy issue could be a tool to put pressure on China for the U.S.

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