While China was putting entire cities into quarantine through February, the Organization of the Petroleum Exporting Countries (OPEC) met together with Russia, which isn’t an official member of the club, to agree on mutually reducing their production. By colluding to limit supply, they could prop up the market price to the benefit of them all.

Thanks to shale oil, the U.S. is now the top producer and a net-exporter of oil (though it has never been a member of OPEC). However, its cost of production is still higher than the gulf countries that it used to rely on for its supply. While the U.S. is also the top consumer, China is second in this regard, accounting for 10% of the world’s consumption as it is the manufacturing hub of the world. Saudi Arabia is now the second-largest producer, while Russia is third.

At the conference, on March 5-6, 2020, Saudi Arabia was trying to convince Russia to scale back its oil production but Russia did not agree to the deal. Frustrated, over the weekend, Saudi Arabia made an about face and instead decided to unilaterally open the floodgates, unleashing additional supply in order to bring down the price of oil to a point where it could cause pain to Russia, punishing them for not following their lead. On Monday, March 9, there was an immediate drop in the price from $50 to $30, with a ripple effect causing havoc on financial markets around the world. Instead of falling into line, Russia also increased its production, starting a game of chicken.

Although Saudi Arabia’s cost of production is low, it does depend on oil revenues to subsidize a comfortable lifestyle for its citizens, in a social contract that maintains political stability as the absolutist monarchy holds on to the reigns of power. In order for the government’s budget, which is 90% dependent on oil, to stay balanced, they need the price to stay at $70. Though their cash reserves can help ride through a temporary blip, it is not a sustainable situation that can be allowed to become permanent.

For its part, less dependent on oil exports, the Russian government budget can survive at $40. The country uses energy policy as a tool for its international relations.

By mid-April, the coronavirus pandemic had led to a lockdown in much of the developed world, sending the global economy screeching to a halt as planes were grounded, factories were shut and cars no longer took people to work. Even after President Trump brokered a new deal between Russia and Saudi Arabia, the dynamics of the market had shifted so drastically that even their promises of production cuts did not revive the market price, which was now at near-mythical depths.

These global forces will affect countries around the world and Armenia will not be an exception. Here are some personal thoughts on what the future may have in store.

Firstly, experts do expect the price of oil to recover eventually. The extent to which that happens and its consequences for oil-producing countries is hard to predict, however. Some companies and governments may be able to sustain low prices for a couple of months, but not much longer. Until the world finds a treatment against COVID-19, air transportation will remain paralyzed. Even afterwards, teleconferencing and remote working norms will lead to some permanent reduction in flights, and consequently the demand for oil.

Secondly, the fight against climate change has led to a downward trend in oil consumption in most western countries since at least 2005. India and China remain the only two big countries with linearly increasing oil consumption due to goods manufacturing and export policy. Many countries have already begun transition to greener energy sources, for both environmental and also strategic energy independence considerations. Netherlands, Germany, Denmark, France, Greece, Italy, Spain and Austria have seen their energy mix from wind, water and sun grow in response to direct government policy. This direction will continue to intensify, creating another permanent change in the oil market. Renewed commitment to the Paris Agreement, which Armenia also signed, will orient countries to a carbon-free future to address another collective action problem that is global warming.

Are we witnessing the end of an era?

In the short term, fossil fuels remain a cheap option for powering our cars, homes and societies. But just as coal fell out of fashion, will oil be next? 2020 will certainly mark a watershed in the energy sector’s transition. Under current conditions, the very profitability of oil is up in the air. Several questions are left with unclear answers. Will the US shale oil industry survive? Will Saudi Arabia and its Persian Gulf neighbors remain stable as their revenues are reduced? Will new sources such as offshore natural gas in the Eastern Mediterranean Sea be the source of new conflict between countries such as Israel, Cyprus, Greece, Turkey, Libya and Egypt? Or will $30 oil ease those tensions?

For Armenia, the most salient question is how its relationship with Russia will be affected. Armenia uses more natural gas than oil. Although they are both hydrocarbons, oil, as a liquid, is much easier to transport, leading to one global competitive market. Building natural gas infrastructure, such as pipelines, requires major investment, leading to more regional markets and a greater susceptibility to monopoly control.

A case in point is that Russia has actually filed for an increase in the natural gas price paid by Armenian consumers, amid the current turmoil.

Picture 2: Armenia’s Energy Mix.