With oil price slump, coronavirus unleashes economic warfare

A new week of the coronavirus crisis is beginning with another unexpected consequence – an oil price crash driven by the outbreak of relatively unrestricted economic warfare between Saudi Arabia, Russia and the West.

Oil futures saw their largest fall in a single day in the early hours of Monday after Saudi Arabia announced it would begin unrestricted oil production, an apparent strike at Russia. That followed a spat between Moscow and Riyadh at an OPEC meeting on Friday.

Then, paradoxically, Russia was refusing a Saudi suggestion to cut production to keep prices higher, arguing that recent falls were pressuring the United States and other shale gas producers that Moscow would like to see go out of business. The Saudi retaliation – playing Russia at its own game – takes advantage of its own greater production capability and lower margins to launch its own attack on the Russian energy sector.

What this face-off means will depend heavily on how long it and the coronavirus crisis last. The bigger picture, however, can already be guessed at. Like the trade war between the United States and China that has dominated geopolitics over the last two years, it is a potent reminder of just how rapidly countries are taking the gloves off when it comes to economic confrontation. It's the kind of protectionism many feared after the financial crash in 2008, and it remains a very open question what that means for a world already questioning relentless globalisation.

This may, of course, be a relatively short-term confrontation. In the long run, Russian and Middle Eastern oil producers have a vested interest in keeping their own industries intact as well as discouraging investment in other options, including shale and green technology. That, however, may point to another larger issue – that the green revolution in Western and other countries poses an existential threat to the Russian economy, and that Moscow is clearly willing to consider a range of actions to reverse that.

DISAPPOINTED

If Russian President Vladimir Putin had hoped his Saudi counterparts would join him in that effort, however, he has clearly been disappointed. It is not yet clear whether the United States and Riyadh colluded in Saudi's decision to open its oil taps, but the decision is broadly in the interests of the United States and Western nations – if not their fracking and shale firms. Those producers will suffer, perhaps fatally, from the collapse of margins, but cheaper energy supplies will reduce some of the wider potential impact of the coronavirus outbreak.

The unravelling of a roughly three-year alliance between Moscow and Riyadh over OPEC production is also geopolitically significant. Particularly following Western unease over the killing of Saudi journalist Jamal Khashoggi in 2017 and the war in Yemen, there has been a growing question mark over the future of the Saudi-Western alliance. Senior Saudi figures, including Crown Prince Mohammed bin Salman, have openly courted China, in particular.

What this decision seems to indicate, however, is that when the chips are down the Kingdom will put its own interests first, whatever that may take. And that, for now, means avoiding jumping into what could have become a strategically hard to leave partnership with Moscow and perhaps by implication also with Beijing. At the very least, the weekend oil production decision leaves Riyadh's options open.

UNTHINKABLE

Still, as the coronavirus crisis intensifies, more and more countries may take decisions they previously thought unthinkable. With more than a hundred deaths in a single day in northern Italy this weekend, that country's government has imposed sweeping quarantines on more than 10 million people in the region. If those numbers are swiftly replicated elsewhere, it is not hard to imagine nations shutting borders, ceasing trade and – particularly damaging in an era of global supply chains – locking down supplies within their borders.

Of all the outbreaks around the world outside China, it will be Italy that most has governments and medical authorities spooked. The number of serious cases there is clearly overwhelming intensive care and other health facilities. For those who had hoped life could continue as normal during an outbreak where most sufferers are not seriously affected, that is amongst the most worrying signs so far.

Also playing on the minds of Western governments will be the apparent success of China's draconian crackdown – at least if Beijing is being honest about the fall in cases. If Italy is seen to have acted too late, that may prompt other countries to impose their own dramatic shutdowns earlier. And if the Italian quarantine is seen to work, it may become the model for actions elsewhere.

How far that will go is another question. One positive effect of the oil price crash will likely be that even as supplies of other essentials dwindle, oil and therefore fuel will continue to flow. Medical supplies, however, may be a very different matter. China – which manufactures half the world's surgical masks – has already halted exports. So may countries that produce vaccines. That is potentially bad news for countries that cannot do so, at least if a vaccine becomes available.

The biggest uncertainty remains over the supply of food. Dramatically lower fuel prices will significantly reduce the cost of production, which is good – high food prices are often associated with instability, such as during the 2011 Arab Spring. Whether countries will be willing to allow essential foodstuffs to cross borders, however, is a different question – particularly if the virus begins to significantly affect farmers and production.

If that does happen, it may affect emerging and poor economies the most, as the UN Food and Agriculture Organisation warned last week. The truth, however, is that no one knows how this will play out – and the coming days and weeks may contain many more surprises.