-Saudi Arabia starts a dangerous game of chicken
-V-shaped or U-shaped, recovery will happen.
No part of this movie looks familiar on the surface. The global economy as we know it, or at least those parts of it most deeply connected to society, are shutting down. Borders are closing and people are staying home, putting much of the capitalist machinery on ice. Some goods, like cleaning supplies, are running low, while others, like oil and refined products, are building up. But there is some solace that, whether V-shaped or U-shaped, recovery will happen. Brent, after taking a beating, was working to hold the $30 per barrel mark. Futures were mixed.
Brent was down some 0.5% as of 8 a.m. ET to trade at $29.91/bbl following another dramatic selloff. The situation could in theory shift from dire to hire as the world quickly shifts mentality, though it will certainly be a bumpy ride.
Brent dropped another half percent in the time it took to write the above paragraph on word that Saudi Arabia was charting record-territory in production, with an estimated 10 million barrels per day expected by May. That’s either a sign of optimism, reckless behavior or Riyadh is firing economic shots across the bow of Russia and perhaps even the United States. According to a joint statement from the IEA and OPEC, income for some of the lower-tier economies that rely on oil and gas could fall by as much as 85% this year.
“This is likely to have major social and economic consequences, notably for public sector spending in vital areas such as healthcare and education,” their statement read.
Elsewhere, Frank Witter, a board member for finance at Volkswagen Group, said these were unchartered waters.
“The spread of coronavirus is currently impacting the global economy,” he said in a statement. “It is uncertain how severely or for how long this will also affect the Volkswagen Group. Currently, it is almost impossible to make a reliable forecast.”
Already, members of the service sector are in a state of panic after governments from around the world shutter bars and restaurants in an effort to stem the spread of the coronavirus. That economic blow will be particularly painful, but it will be temporary. Refining, manufacturing and other segments of industry may not be so lucky. In the southern US, the situation for energy in particular was troubling, with the Dallas Fed in January noting that jobs in the energy sector fell 12% in the fourth quarter after a 5% decline in the previous period. Hess Corp. reported Tuesday it was cutting spending by $800 million. Writing in Politics Among Nations, Hans J. Morgenthau observed that because the technology of modern warfare requires things like airplanes, highways, trucks and similar products, manufacturing and industrial capacity are “indispensable elements of national power.” Putting Saudi energy policies through that grinder reveals a particularly risky game of geopolitical chicken.