The end of the oil age

Submitted by InfoBrics, authored by Lucas Leiroz, research fellow in international law at the Federal University of Rio de Janeiro…

A historic agreement was signed last weekend between the main oil powers in the world, promoting an unprecedented cut in the production of daily barrels in order to face the global economic crisis generated by the pandemic and the commercial war on oil prices. In short, the agreement provides for a cut in oil production by 9.7 million barrels per day from May 1, 2020, for two months, in order to stabilize the global market. In June, the level of cuts will be reduced to 7.6 mbpd by the end of the year, then to 5.6 mbpd by the end of 2022, when the agreement expires.

Mexican Energy Secretary Rocío Nahle said in a social network that the agreement signed by the 23 countries participating in the remote meeting last Sunday was “unanimous” and “will start a reduction in the oil platform of 9.7 million barrels per day starting in May.” According to the Azerbaijan Ministry of Energy, at this tenth meeting of the OPEC members and non-members “it was decided that the United States will reduce its production by an additional 300,000 barrels per day to compensate” for what Mexico wants to cut. Initially, Mexico should reduce its production by 400,000 barrels a day, but it refused to make a cut of this size. On Thursday, OPEC+ and other producers reached a basic agreement to reduce their supply by 23% in the face of the drop in demand and prices caused in the midst of the Covid-19 pandemic, however, the parties were unable to seal a deal because Mexico abandoned the meeting due to a disagreement with such levels of cut. Kuwait’s oil minister Khaled al Fadhel said on Twitter on Sunday that thanks to “wise instructions, continued efforts and continued talks”, it was possible to reach a “historic agreement” to cut the production of oil.

Around the world, the responses of several political analysts to the news of the agreement have been the same: historical, but insufficient. The reduction is undoubtedly significant, but it does not seem to be strong enough to deal with a global quarantine scenario, where practically all air transport and much of the land transport were paralyzed, in addition to the devastating effects of the economic recession. The world demand for oil fell by an uncertain number between 20% and 30%, which is frightening when we consider that we are far from any sign of improvement in the situation of the infection.

One way to understand the optimism of world leaders in relation to the agreement is to imagine it only as a bridge to a much larger cut in production. Thus, we understand the optimism of American President Donald Trump, who wrote on his social network: “Having been involved in the negotiations, to put it mildly, the number that OPEC + is looking to cut is 20 Million Barrels a day, not the 10 Million that is generally being reported. If anything near this happens, and the World gets back to business from the Covid 19”. This expectation is shared by Prince Abdulaziz bin Salman, Saudi Arabian Minister of Energy, who believes in a cut of 19.5 million barrels per day.

In fact, neither the apparent optimism of world leaders nor the pessimism of analysts is sufficient to understand the new dynamics of the global economy and the strategic importance of this agreement. The fundamental mistake is to reduce the crisis generated by the coronavirus to a mere natural catastrophe, the effects of which will be reversed in the medium or long term. Conversely, the data seem to indicate that this crisis is not only unprecedented, but irreversible, which will force international society to follow paths completely different from those followed in the last decades.

In a recent article, I commented on how the coronavirus brings us to a new “Bretton Woods moment”, predicting that soon the main world powers will come together again to decide a future for the world economy, once and for all overcoming financial capitalism, whose structural crisis has dragged on since 2008. Likewise, the central role played by oil in the global economy seems to be in collapse. The agreement for the cut in production does not, in the end, have a simple objective of facing the coronavirus, but that of beginning the end of the oil era. In a world with increasingly scarce natural resources, with profound environmental damage, with an increasingly fierce struggle between global potentials and multinational corporations for the control of natural reserves and with the rise of the so-called “green capitalism” (the “non-profit” lobby), how can we expect the oil sector to continue to guide the world economy and sustain the foundations of the unproductive financial system? Still, with the recent rise of the Petroyuan and the signs of crisis of the dollar’s hegemony, what would be more profitable for the US than a systematic devaluation of oil?

As Michael Liebreich, founder and senior of Bloomberg New Energy Finance, recently wrote: “I’ve always said the end-game for oil is not when it reaches $ 200 / barrel, it’s when it settles at $ 20 / barrel”. In other words: the end of the oil era will not be due to the maximization of its demand, but to its decrease, due to its devaluation. Perhaps awareness of this reality is the reason for the optimism behind last weekend’s deal. Perhaps the interest behind the agreement is not to “save” the oil sector, but to program a profitable crisis there, as a major damage control mechanism.

No one knows what will be the status of the world economy in two or three years. As stated earlier, a new economic order is likely to be planned at an extraordinary meeting of the world’s greatest leaders, from which a new phase of capitalism or an alternative system will emerge. What is known is that in the same way that this system emerged, it will fall: programmed, previously agreed by the global powers.