On March 5th, 2020 the Organization of the Petroleum Exporting Countries (OPEC) held an emergency meeting in Vienna, Austria, to discuss oil production cuts to ensure the price of oil could be maintained throughout the oncoming wave of economic troubles caused by Covid-19. In attendance were representatives from the 13 member OPEC countries led by their largest producer Saudi Arabia, and a select group of 10 non-OPEC producers led by their largest producer, Russia.

OPEC’s Proposal was to have OPEC members cut production by 1,000,000 barrels, and have non-OPEC members cut by 500,000 barrels per day and per country. OPEC as part of their proposal stated that there was no back-up plan, or room for negotiations, essentially strong-arming all producers into these cuts. After hours of discussion, the meeting ended with Russia and the non-OPEC producers walking out without an agreement. In turn Saudi Arabia stated they would be increasing oil production in an effort to force non-OPEC countries into production cuts.

Global demand is already stressed and crumbling fast as the world wakes up to the necessary efforts to stop the Covid-19 epidemic. The airline, shipping, production and manufacturing industries effectively came to a grinding halt. This coupled with the news of increasing oil production at a time of weakening demand saw the price of oil crash 25% overnight, and continued lower in the following days, hitting a low of $20.08 USD on March 18, 2020. Prices like this haven’t been seen since March of 2002.

OPEC controls 79.4% of known world oil reserves, and accounts for 60% of current global production; as such OPEC has significant influence over oil prices globally. This is not the first time that Saudi Arabia has adjusted their production intentionally resulting in a price shock. In July of 2008 oil hit an astounding $147.27 per barrel on production restrictions, only to plummet to a price of $35.13 before the end of the same year, just 5 months later, as the global financial crisis brought the world economy to an abrupt crash.

Oil price wars have a significant impact on the global economy. Cheap oil is typically good for the extraction of commodities, and manufacturing of goods; however there are also drawbacks. The US, in the years since the 2008 financial crisis, have invested heavily in ramping up production of US oil in an effort to be self-sufficient. The result is a significant population who work in the field of oil and gas production, and now heavily indebted companies who are dependent on a stable oil price which supports economical production. Sustained long term low oil prices will result in defaults in the oil and gas industry, leading to increased unemployment, supercharging the effects of the currently challenged Covid-19 economic environment.

As the stock markets fall as investors expectations are constantly reset by incoming data resulting from Covid-19 and the oil price wars, fear takes hold of the markets. Since the slide started, billions of dollars has been lost from stock market valuations for oil and gas companies globally. This fear, coupled with the need to liquidate stock to pay off bad debts, and prepare coffers for future investments when opportunities arise, have resulted in significantly depressed share pricing. If oil prices stay down for too long however, defaults will increase resulting in loss of infrastructure for future production.

In order for North American oil production to be profitable gas prices need to be maintained around $50 to $60 per barrel. Russia and Saudi Arabia on the other hand still turn a profit at $20 due to their ease of extraction and refinement.

Russia and Saudi Arabia both have some interest in seeing the price wars continue, as they will effectively reverse the investments made by US Oil producers over the past 12 years, and maintain future market share in doing so.

The United States President, Donald Trump, has effectively done nothing to combat the decline in oil pricing.