Saudi-Origin Oil War, Why Everyone Fears 'Low Oil Prices' (Comprehensive)

Saudi Arabia Plans Record Production of 13 Million Barrels
Low Oil Prices Benefit Non-OPEC Countries but Consumption Growth Hindered by COVID-19
Widespread Impact on Oil-Related Industries
Renewable Energy Sector Also Faces Contraction Due to Low Oil Prices
Increased Risk of Financial Market Turmoil from Low Oil Prices

[Asia Economy Reporter Naju-seok] Saudi Arabia has announced its largest-ever production increase target, intensifying the 'oil war.' Amid the global difficulties caused by the novel coronavirus infection (COVID-19), there are analyses that low oil prices will also weigh heavily on the economic situation.

On the 11th (local time), Saudi state-owned oil company Aramco announced through a disclosure to the Riyadh Stock Exchange (Tadawul) that it will increase its sustainable production capacity to 13 million barrels per day. The day before, Aramco had indicated its intention to raise daily production to 12.3 million barrels, but in just one day, it increased the production target by 700,000 barrels.

Experts are expressing greater concerns over Saudi Arabia's production increase announcement. Market participants had previously predicted that when Saudi Arabia announced the initial plan of 12.3 million barrels per day, it would release 300,000 barrels of crude oil that had been reserved, assuming Saudi Arabia's maximum production capacity was 12 million barrels. However, Saudi Arabia broke the analysis that even 12.3 million barrels would be difficult to sustain long-term by presenting a sustainable production capacity of 13 million barrels. Moreover, the decision to expand oil production facilities rather than just maximizing the operation of existing facilities is seen as a fundamentally different approach.

Not only Saudi Arabia but also the United Arab Emirates (UAE) and Russia announced plans to increase production by 1 million barrels and 500,000 barrels respectively, causing oil prices to plunge again. On the same day, West Texas Intermediate (WTI) crude oil for April delivery on the New York Mercantile Exchange (NYMEX) closed at $32.98 per barrel, down 4.0% ($1.38). If oil-producing countries competitively increase production to offset income losses caused by falling oil prices, the market situation could worsen further.

Economic analysis institutions view this oil war as a 'no-winner battle.' While low oil prices have the advantage of allowing non-oil-producing countries like South Korea to purchase oil cheaply, the cost to be paid in return is significant. Furthermore, in a world economy frozen by COVID-19, the contribution of low oil prices to economic activity is limited. Since oil-producing countries are expected to maintain their market shares individually and increase production to compensate for losses caused by low oil prices, it is likely to develop into a war of attrition.

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Investment bank Morgan Stanley analyzed, "Low oil prices make capital investment in oil-producing countries and energy-related companies inevitable, and the bankruptcy risk of energy-related companies is rising, which could escalate crises in the corporate bond market and others." It added, "Consumers may benefit from low oil prices, but (due to the impact of COVID-19) this will not lead to a short-term increase in consumption."

Oxford Economics stated, "If low oil prices improve households' real income, it should lead to increased consumption, but at this point, that is a distant prospect," adding, "Due to COVID-19 and the resulting loss of economic confidence, even if real income improves, it is difficult to translate into consumption." However, Oxford Economics expects that if low oil prices persist until next year, the global gross domestic product (GDP) could rise by about 0.3%. It also sees the possibility of lowering inflation rates in various countries. The key issue is whether the increase in real income from low oil prices will outweigh the demand contraction caused by COVID-19.

There are also concerns that poor countries dependent on oil exports will face increased difficulties. Fatih Birol, Executive Director of the International Energy Agency (IEA), said, "Countries like Algeria, Iraq, and Nigeria will face huge budget deficits as oil prices have fallen by 25% this week," adding, "In this case, they will find it difficult to respond properly to the COVID-19 threat."

There are also warnings that the entire oil-related industry will face a crisis. Credit rating agency Moody's said, "Energy-related companies will face difficulties due to low oil prices," and "If the situation prolongs for several months, companies with credit ratings below B1 or those with high debt could be at risk." Moody's predicted that all sectors from oil exploration to transportation and related industries will inevitably be affected.

Additionally, experts believe that low oil prices will dampen efforts in power efficiency and renewable energy industries. The electric vehicle industry, which had shown growth, will also inevitably be hit. When oil prices are high, governments provide more incentives for electric vehicles, but if low oil prices persist, reliance on fossil fuels will increase. Although the need to respond to climate change is significant, low oil prices could slow down the pace of energy transition.

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However, there is also analysis that renewable energy could rather gain attention. Mark Lewis, head of BNP Paribas's Climate Change Investment Research Institute, said, "Renewable energy may be less profitable compared to coal or gas exploration, but in the long term, it offers price stability," adding, "In the current market, this aspect could actually make renewable energy investment more attractive."

This content was produced with the assistance of AI translation services.