In the past, oil crisis were associated with a sharp increase of the barrel price, as at the beginning of the Seventies or in 1979, which had generated an inflationist wave, followed by a restrictive action by the central banks. Through a sharp augmentation of their interest rates, they had caused recessions. These last days, it is the fall of the barrel value, between 30 and 40%, which generates a deep worry. Financial markets, already affected by the corona virus epidemic, have plummeted and the trend was amplified by the American president declarations. Oil company shares or industrial equipments for exploration and production ones have not been the only ones to be affected. The prospect of a major recession of the world economy is increasing after an exceptionally 10-years long growth period.
The origin of the price fall is double. There is first and especially an overabundant market context. During a long time, the general thinking being that natural resources were, by nature, limited. it was to be expected the apparition of a penury and it was necessary to be prepared to it. It was the theory of the “peak oil”, launched by the Roma club in the Seventies and it became the basis of the economic thinking in the energy sector. But it was ignoring that, if by nature resources are limited, human capacities to find these resources were unlimited and it is what happened with the shale oil and gas revolution. A new extraction technology has been used in the U.S., which has allowed to the oil production to rise, between 2012 and 2019 from 8 to 16 billion barrels per day. During that period, production of the two others major producers, Russia and Saudi Arabia has fluctuated between 10 and 12 million b/j. Barack Obama decision to authorize producers to export in 2015 has extended the consequences of this major change to the oil world market. American subsoil is definitely not the only one to contain oil able to be extracted by this technique and China has already launched extraction programs in the center of the country. It would be surprising if it was an isolated case. The “peak oil” theory isn’t anymore a topical question and the pressure on the prices has become structural, especially in a context where policies in favor of reduction of greenhouse gas emissions are puting pressure on consumption.
The second cause of this fall is a geopolitical one. It is the paraded dissension between Russia and Saudi Arabia and the undiplomatic roughness of the explanations given by both of them which has generated the price fall. The arrival on the market of American exports had already reduced OPEC power in the past and that had showed a price fall in 2015 which came briefly under 50 dollars by barrel before rebounding thanks to the conclusion an informal agreement with Moscow. The barrel stabilized around 60$, with a peak at 70$ when tensions in the Middle East had affected the security of the Ormuz Strait. But that situation did not satisfied the two parts because production reductions accepted by Moscow and Ryad, had been more than offset by the increase of the American production which became the main benefactor of that agreement. It is to put an end to that situation that Moscow has refused to reduce again its production. Then Ryad has tactlessly reacted through the announcement of an increase of its production, which has started the price fall.
The breaking off occurred between the two countries and the price war which could result of it is a paradox because it hurts both of them without affecting their competitor against whom the action is conducted. Regarding political issues, the American president has no reason to be afraid by a gasoline price reduction in the middle of his electoral campaign and the American production is not going to be affected. Important productivity gains have been obtained in the working of the new oilfields, which, atop of that, are much more flexible than the traditional fields. To the opposite, investments to find new resources and to exploit them will be reduced, which will hurt a whole industrial sector. Several small producers in the new basins nicknamed, with a dose of humor, as “Cowboyistan” will also be in trouble to reimburse the loans they have contracted. That will put in trouble some American banks but the consequences will be without any bearing on with the sub-prime crisis due to the amount of money at stake, even if some observers are starting to make the parallel.
The financial markets fall, caused by the corona virus outbreak will stop once that one is under control and the economic rebound will then profit from the oil prices fall which has always been considered as good news, especially in the countries which have no resources and which must import them. That will contribute to the reduction of their trade deficits and to the purchasing power increase. To the opposite, the action of the reduction of the emissions of greenhouse gas will be twarted and the policies aimed to abandon fossil fuels much more difficult to put into practice and especially to make them accepted by consumers. The attractiveness of electric vehicles which is until now very low will be even reduced.
The introduction by Brussels of new rules accompanied by heavy penalties regarding the emissions of vehicles with fossil fuel engines constitutes already a threat for car makers. Its application is delayed by a year due to the practice consisting in having registered in advance in 2019 a huge number of cars in order to withdraw them from 2020 statistics. They will resale them to their clients as second-hand vehicles with zero kilometers. But the prospect of heavy sanctions is still there with the risk of a crisis in the car industry which is, in the major European countries, the first industrial sector. Oil price fall can only aggravate this risk.
France did innovated through the instauration, 20 years ago, of a measure which has been since abrogated, a “floating tax” on fossil fuels. That tax on gasoline fluctuated according to the prices, in order to avoid hurting purchasing power when there was a strong price increase and, in the opposite situation, to avoid encouraging behaviors in contradiction with commitments in favor of environment. Through the non passing on the full oil price fall with a tax increase, the State could today both acting in favor of environment and getting resources to support household, enterprises and the healthcare system which is confronted with the corona virus crisis.
When you have a new crisis, you must find innovative solutions. The crisis generated by the corona virus outbreak will finish with its extinction and the economy will come back to classical mechanisms, even if delocalization strategies will be revised downward. To the opposite, the persistence of a low level of oil prices will have important structural consequences and the States will have to find appropriated solutions to keep their efforts to fight climate warming. Their leaders as central banks presidents then will have to abandon their media position to give the priority to professionalism.