Dong Xiucheng: Saudi Arabia’s oil price war has caused OPEC to exist in name only, and domestic restrictions on the “$40 floor price” should be relaxed
(Source: "Sohu Think Tank" 2020-03-18)
Professor Dong Xiucheng, w88 casino of International Business and Economics, w88 casino
On March 7, Saudi Arabia announced an "oil price war". Subsequently, international oil prices fell sharply, and Brent crude oil futures fell by more than 31%. On March 17, the Saudi Ministry of Energy once again stated that it would increase crude oil exports to a record high of more than 10 million barrels per day starting in May.
What is the meaning behind the increase in production by Saudi Arabia, Russia and several other OPEC members? Where is the bottom of national crude oil prices? Will it further promote the reform of domestic oil prices?
Dong Xiucheng, a professor at the w88 casino of International Business and Economics at the w88 casino, told Sohu Think Tank that the OPEC+ production limit agreement has not been reached, leaving the production of various oil countries free. The spread of the new coronavirus epidemic has caused a sharp contraction in global crude oil demand. "Currently, supply exceeds demand in the international oil market, and oil-producing countries are seizing market share through price wars."
Will the oil price war affect changes in the global oil pattern? Dong Xiucheng believes that major structural changes are difficult. He said that the global market demand for oil is limited, about 100 million barrels per day, and Saudi Arabia accounts for more than 30%. The change in the pattern is closely related to the production capacity of oil countries. Even if Saudi Arabia operates at full capacity, its proportion will be limited.
"Although the large supply pattern has little impact, it will squeeze the oil production of the United States, Russia and other countries." Dong Xiucheng said, "The key to the price war is that changes in oil prices, for buyers, will definitely be willing to buy whoever is cheaper."
According to the latest news, Brent oil prices fell below the $30 mark on Tuesday, the first time since 2016 that the indicator closed below $30.
Dong Xiucheng emphasized that the result of the price war is that everyone loses, including Saudi Arabia, Russia, and the United States. Everyone will be hurt. "Saudi Arabia's oil output costs are lower, at least it will not lose money. Russia and the United States have higher costs than Saudi Arabia, but they will not irrationally lower the cost price."
As far as the OPEC organization is concerned, Dong Xiucheng said, "OPEC is said to exist in name only. This organization still exists and has not disintegrated, but it has not played a corresponding role."
It is worth noting that with the sharp drop in international oil prices, domestic gasoline and diesel prices have dropped by 1,015 yuan and 975 yuan per ton respectively since March 17. The decrease is smaller than the international oil price.
Dong Xiucheng said that my country’s refined oil pricing has a complete pricing process and management methods, which set upper and lower limits for price control. That is, when the international crude oil price is lower than 40 US dollars per barrel, the domestic gasoline and diesel prices will not be lowered, and when the international crude oil price exceeds 130 US dollars per barrel, the domestic domestic prices will not be raised.
On March 17, the National Development and Reform Commission adjusted domestic oil prices to the level of US$40/barrel under this mechanism. "If we follow the actual linkage of international oil, the decline should be even greater." Dong Xiucheng said.
He once said that there are two considerations in setting the lower limit of 40 US dollars. First, if the lower limit is too low, it will hinder the application of other energy sources and is not conducive to the country's response to climate change; second, domestic crude oil relies heavily on imports, and production costs are still high.
How to adjust the domestic pricing mechanism next? Dong Xiucheng believes that the situation of international and domestic oil supply exceeding demand will continue for a long time. On the one hand, supply capacity is growing faster than consumption, making it difficult for supply to exceed demand; on the other hand, global, including China's, consumption of oil will reach its peak.
"So China should liberalize prices. I personally advocate that the government should not control prices in the future and let the market set prices. I think this should be a matter of course." Dong Xiucheng emphasized.
He also said that the oil price war started by Saudi Arabia, Russia and other countries cannot end in 10 or 8 days. Only after a period of time, when everyone feels that they can no longer hold on, will it be easy for both parties to cooperate again.
When talking about the specific duration, Dong Xiucheng said, "I don't think it will take half a year."
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