Argument

The Coronavirus Oil Shock Is Just Getting Started

The pandemic is causing crisis for energy-producing governments around the world—and could change the global economy forever.

A trader at the Dubai Stock Exchange in the United Arab Emirates.
A trader walks beneath a stock display board at the Dubai Stock Exchange in the United Arab Emirates on March 8. GIUSEPPE CACACE/AFP via Getty Images
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EDITOR’S NOTE: We’re making some of our coronavirus pandemic coverage free for nonsubscribers. You can read those articles here. You can also listen to our weekly coronavirus podcast, Don’t Touch Your Face, and subscribe to our newsletters here.

The idea of a negative price for any commodity is outlandish, implying the seller is prepared to pay a buyer. But for oil, the largest commodity market in the world, the basic fuel of modernity, to be trading at negative prices is nothing short of mind-boggling. In the early afternoon EDT of April 20, the May contract for West Texas crude touched negative $40.32. It was a succinct demonstration of how severe the impact of the COVID-19 crisis has been.

What triggered the inversion of prices on April 20 was the overflow of unsellable oil in the tank farms of Cushing, Oklahoma, where U.S. oil futures are settled. But the collapse in oil prices has sent shockwaves rippling around the world.

People in the West tend to think about oil shocks from the perspective of the consumer. They notice when prices go up. The price spikes in 1973 and 1979 triggered by boycotts by oil producers are etched in their collective consciousness, as price controls left Americans lining up for gas and European governments imposed weekend driving bans. This was more than an economic shock. The balance of power in the world economy seemed to be shifting from the developed to the developing world.

The same thing happened more gradually in the early 2000s when oil prices surged and remained at elevated levels until 2014. Once again, consumers were squeezed—and not only in the West. The poorest developing countries were particularly hard-hit. The flip side of this was the enormous wealth accumulated by oil producers. Emerging-market fossil fuel companies such as Brazil’s Petrobras and Malaysia’s Petronas were lionized in global financial markets. Backed by the power of Gazprom, Lukoil, and Rosneft, Vladimir Putin’s Russia reemerged as a geopolitical force.

For the vast majority of countries in the world, the decline in oil prices is a boon.

If a surge in fossil fuel prices rearranges the world economy, the effect also operates in reverse. For the vast majority of countries in the world, the decline in oil prices is a boon. Among emerging markets, Indonesia, Philippines, India, Argentina, Turkey, and South Africa all benefit, as imported fuel is a big part of their import bill. Cheaper energy will cushion the pain of the COVID-19 recession. But at the same time, and by the same token, plunging oil prices deliver a concentrated and devastating shock to the producers. By comparison with the diffuse benefit enjoyed by consumers, the producers suffer immediate immiseration.

Though they are less well remembered in the West, such counter-shocks have happened before. The first came in 1985 when Saudi Arabia began a price war to reconquer market share it had sacrificed to fellow OPEC members. The second came in 1997 when the Asian financial crisis led to a collapse in demand. The third began in June 2014 as surging production from U.S. shale fields fundamentally altered the balance between demand and supply. That slide was halted temporarily in September 2016 by an agreement between OPEC and Russia to limit production.

We are now facing a fourth counter-shock. Faced with the unprecedented collapse in demand due to COVID-19, talks between Russia and Saudi Arabia broke down in early March. Russia refused to limit production, and Saudi Arabia doubled down by dumping oil on global markets at steep discounts. Despite the effort to patch together an agreement on production restriction in recent weeks, the overhang of supply is massive. A fleet of up to 20 supertankers loaded with Saudi oil is bearing down on American oil ports. Even if the negative prices for oil in May were the result of technical factors in the futures market, the prices for June are also historic lows.

In inflation-adjusted terms, oil prices are similar to those last seen in the 1950s, when the Persian Gulf states were little more than clients of the oil majors, the United States and the British Empire. All of this raises the question of what the impact will be on today’s global producers.


Against the backdrop of the Petronas Twin Towers, a drone sprays disinfectant in Kuala Lumpur, Malaysia, as a preventive measure against the spread of the coronavirus March 31. Petronas has accounted for 15 percent of Malaysia’s total revenue over the past five years.

Against the backdrop of the Petronas Twin Towers, a drone sprays disinfectant in Kuala Lumpur, Malaysia, as a preventive measure against the spread of the coronavirus March 31. Petronas has accounted for 15 percent of Malaysia’s total revenue over the past five years. MOHD RASFAN/AFP via Getty Images

We tend to think of oil states as rich oligarchies serviced by armies of foreign workers, and the image applies to the Gulf states. Lower prices will certainly require them to tighten their belts. In February, even before the coronavirus hit, the International Monetary Fund was warning Saudi Arabia and the United Arab Emirates that by 2034 they would be net debtors to the rest of the world. That prediction was based on a 2020 price of $55 per barrel. At a price of $30, that timeline will shorten. And even in the Gulf there are weak links. Bahrain avoids financial crisis only through the financial patronage of Saudi Arabia. Oman is in even worse shape. Its government debt is so heavily discounted that it may soon slip into the distressed debt category. At that point it will most likely be forced to turn either to Riyadh or to the IMF for help.

The sudden shift in the terms of trade undercuts export revenues, budget stability, and growth prospects.

The economic profile of the Gulf states is not, however, typical of most oil-producing states. Most have a much lower ratio of oil reserves to population. Many large oil exporters have large and rapidly growing populations that are hungry for consumption, social spending, subsidies, and investment. Whereas such countries as Saudi Arabia and Kuwait routinely earn more in revenue than they can sensibly invest at home, even at the height of OPEC’s power in the 1970s, the shah’s regime in Iran not only consumed all its oil revenue but used its oil assets as collateral for borrowing.

It is therefore not surprising that counter-shocks to oil prices often trigger political upheaval. The sudden shift in the terms of trade undercuts export revenues, budget stability, and growth prospects. Fiscal crises caused by falling prices limit governments’ room for domestic maneuver and force painful political choices. The dilemma of defaulting on debt owed to foreign creditors and imposing austerity on populations has been the cause of grave political crises, some with serious geopolitical consequences.

In the late 1980s, falling oil revenues undercut Mikhail Gorbachev’s efforts to reform Soviet communism, accelerating the end of the Soviet Union. Both Hugo Chávez in Venezuela and Vladimir Putin in Russia were able to rise because their predecessors failed to stabilize domestic politics in the wake of the price plunge of the late 1990s. Since 2014 the fall in oil prices has once again applied huge pressure to the regime of Chávez’s successor, Nicolás Maduro, in Caracas. While U.S. economic sanctions against Russia and Venezuela have been prominent in the news, aggressive competition from U.S. shale producers has been as important in shaping their economic fortunes.

So who is vulnerable now?

Under Putin, Russia overhauled its economic policy after the 2014 price collapse. Its budget was pared by a sustained austerity drive. When it launched the current oil price war in March by refusing to cooperate with OPEC in supply reductions, Moscow probably did not anticipate the collapse that would ensue. But Russia started with an exchange reserve of just shy of $570 billion, and due to its budgetary consolidation, it only began running up deficits once oil prices fell below $42.

Other emerging-market oil producers, by contrast, have to deal with large debt loads. Petrobras in Brazil has $78.9 billion of net debt as of the end of 2019 and one of the highest debt burdens of all oil firms. Its bonds trade at junk levels. But there have so far been few signs of panic. In Malaysia, Petronas has accounted for more than 15 percent of the government’s total revenue over the last five years. It was put on a negative outlook by Fitch. But like its government, it maintains a solid A- bond rating. These are resilient businesses with deep pockets in diversified economies.

An Ecuadorean waves a national flag in Quito on Oct. 12, 2019, during the 10th day of protests over a fuel price hike ordered by the government to secure an IMF loan. The government’s plans to abolish fuel subsidies had to be halted because of the enormous popular protests.

An Ecuadorean waves a national flag in Quito on Oct. 12, 2019, during the 10th day of protests over a fuel price hike ordered by the government to secure an IMF loan. The government’s plans to abolish fuel subsidies had to be halted because of the enormous popular protests. MARTIN BERNETTI/AFP via Getty Images

After Venezuela, Ecuador is the Latin American oil producer facing the most urgent problems. In February 2019, it obtained a $10.2 billion loan package from a group of multilateral lenders led by the IMF. But to unlock this funding it had to push through painful reforms. By last October, the government’s plans to abolish fuel subsidies had to be halted because of enormous popular protests. Ecuador was already in this unstable condition when the oil price shock hit. This weekend, the government announced it had agreed with investors to delay $800 million in interest payments on its $65 billion foreign debt. This means that Ecuador is the second Latin American country after Argentina to enter technical default this year.

Populous middle-income countries that depend critically on oil are uniquely vulnerable. Iran is a special case because of the punitive sanctions regime imposed by the United States. But its neighbor Iraq, with a population of 38 million and a government budget that is 90 percent dependent on oil, will struggle to keep civil servants paid. Not paying the state administration is a recipe for instability at a time when the country is the theater of a shadow war between Washington and Tehran.

Populous middle-income countries that depend critically on oil are uniquely vulnerable.

In North Africa, Algeria—with a population of 44 million and an official unemployment rate of 15 percent—depends on oil and gas imports for 85 percent of its foreign exchange revenue. In the late 1980s, the oil shock triggered by Saudi Arabia wreaked havoc in Algeria, destabilizing its state-dominated economy. As harsh austerity measures were implemented, the Islamic Salvation Front grew as the main organization opposition to the National Liberation Front regime. When the Algerian military denied the Islamists their electoral victory in 1991 it unleashed a civil war that raged until 2002 and cost an estimated 150,000 lives.

The oil and gas boom of the early 2000s provided the financial foundation for the subsequent pacification of Algerian society under National Liberation Front President Abdelaziz Bouteflika. Algeria’s giant military, the basic pillar of the regime, was the chief beneficiaries of this largesse, along with its Russian arms suppliers. The country’s foreign currency reserves peaked at $200 billion in 2012. Spending this windfall on assistance programs and subsidies allowed Bouteflika’s government to survive the initial wave of protests during the Arab Spring. But with oil prices trending down, this was not a sustainable long-run course. By 2018 the government’s oil stabilization fund, which once held reserves worth more than one-third of GDP, had been depleted. Given Algeria’s yawning trade deficit, the IMF expects reserves to fall below $13 billion in 2021. A strict COVID-19 lockdown is containing popular protest for now, but given that the fragile government in Algiers is now bracing for budget cuts of 30 percent, do not expect that calm to last.

One thing that Algeria has going for it is that it has virtually no foreign debt. Even if borrowing in the current moment is unattractive, the tough domestic choices it will need to make will not be compounded by an external squeeze. The same cannot be said for the two major producers of sub-Saharan Africa: Angola and Nigeria.

The Kaombo Norte, a floating production storage and offloading vessel operated by a multinational oil company, sits off the coast of Angola on Nov. 8, 2018. The arrival of the platform ship, which belongs to French oil giant Total, was a timely lifeline for the Angolan government.

The Kaombo Norte, a floating production storage and offloading vessel operated by a multinational oil company, sits off the coast of Angola on Nov. 8, 2018. The arrival of the platform ship, which belongs to French oil giant Total, was a timely lifeline for the Angolan government. RODGER BOSCH/AFP via Getty Images

Angola’s President João Lourenço came into office in 2017, succeeding the country’s longtime ruler José Eduardo dos Santos, who had been in power for 38 years. Lourenço has struggled to contain Angola’s debt burden, which has surged from about 30 percent of GDP in 2012 to 111 percent of GDP in 2019. Before last month’s price collapse, Angola was already spending between one fifth and one third of its export revenues on debt service. That burden is now bound to increase significantly. Ten-year Angolan bonds were this week trading at 44 cents on the dollar. Having been downgraded to a lowly CCC+, it is now widely considered to be at imminent risk of default. Because servicing its debts requires a share of public spending six times larger than that which Angola spends on the health of its citizens, the case for doing so in the face of the COVID-19 crisis is unarguable.

Last month Nigeria overtook South Africa as the largest African economy. As a large and diversified economy, it is not a petrostate in the sense that Iraq and Algeria are. But most of Nigeria’s economic activity is informal, untaxed, and unconnected to the world economy. As a result, oil is responsible for the lion’s share of the government budget and 90 percent of foreign exchange earnings. The oil price downturn of 2014 already inflicted serious pain. Faced with the price collapse of 2020, Finance Minister Zainab Ahmed has declared that Nigeria is now in “crisis.” In March, the rating agency Standard & Poor’s lowered Nigeria’s sovereign debt rating to B-. This will raise the cost of borrowing and slow economic growth in a country in which more than 86 million people, 47 percent of the population, live in extreme poverty—the largest number in the world. Furthermore, with 65 percent of government revenues devoted to servicing existing debt, the government may have to resort to printing money to pay civil servants, further spurring an already high inflation rate caused by food supply shortages.


Swings in oil prices mark epochs in the development of the world economy. The price surge of the 1970s and the nationalization of the Middle East oil industry announced the definitive end of the imperial era. The 1980s saw the creation of a market-based global energy economy. The early 2000s seemed to open the door on a new age of state capitalism, in which China was the main driver of demand and titans like Saudi Aramco and Rosneft managed supply.

But the price collapse of 2014 created problems for this model of petrostate capitalism. China’s demand growth is no longer as rapid as it once was. America’s shale producers have upset the efforts of OPEC and Russia to manage the market. As the failure of efforts to stabilize oil prices in the face of the COVID-19 crisis has demonstrated, there is currently nothing one could call an order in the oil market. The diplomacy of supply agreements is fragile. The geopolitics are haphazard. It is unclear whether the U.S. administration prefers a low or a high price for oil. The financial foundations of the shale boom are precarious. The physical infrastructure to store oil is inadequate. And all the while the futures markets react with merciless speed.

For states such as Iraq, Algeria, and Angola, the threat is nothing short of existential.

If this lack of order in itself marks an important historical caesura, it raises the question of what comes next. The giants such as Saudi Arabia and Russia will exploit their muscle to survive the crisis. But the same cannot so easily be said for the weaker producers. For states such as Iraq, Algeria, and Angola, the threat is nothing short of existential. What is the long-term horizon for them?

Many of the commodity producers hit hardest by the oil price shock will be in line for financial assistance from the IMF and the World Bank. The priority right now is immediate assistance. But in the background of the spring meetings lurked the question of whether China would cooperate with other international creditors. Since 2004, Beijing has made $152 billion in resource-backed loans to African, Asian, and Latin American economies. The Chinese state now owns large parts of both Venezuela’s and Angola’s external debt. Is China systematically reshaping the commodity supply chains of the world by using its financial and political influence? If so, one might expect the COVID-19 crisis to be a moment in which it would put its foot down. But Beijing has so far shown little interest in exploiting the crisis for debt-book diplomacy. It has signaled its willingness to cooperate with the other members of the G-20 in supporting a debt moratorium. This is helpful in that it facilitates the negotiation of debt relief. Western creditors will worry less that whatever concessions they make will help to repay debts owed to China.

A motorist rides April 2 along a deserted street in New Delhi, which is regularly listed as one of the world’s most polluted cities but has seen periods of clean air as a result of the coronavirus lockdown.

A motorist rides April 2 along a deserted street in New Delhi, which is regularly listed as one of the world’s most polluted cities but has seen periods of clean air as a result of the coronavirus lockdown.JEWEL SAMAD/AFP via Getty Images

While debt relief can provide breathing room, this does not answer other fundamental questions. In a century that will be marked by climate change, how useful is it to restore profits and prosperity based on fossil fuel extraction? With the possibility that the coronavirus might lower global carbon emissions by 5 percent this year, is this not the moment for a reenvisioning of the world economy toward a horizon of energy transition and decarbonization?

The COVID-19 crisis drives home that high-cost producers are on a dangerously unsustainable path that can’t be resolved by states propping up their uncompetitive oil sectors.

Before the crisis struck, many political and economic analysts were already concerned about vulnerable fossil fuel producers. The question was not how they would respond to negative oil prices but how they would be affected by the renewable energy transition and carbon taxes. How would the most vulnerable oil producers fare in a world beyond carbon, a world in which energy prices were depressed and yet oil consumption was slashed? That constellation is unlikely to occur under normal circumstances, as low prices will generally stimulate fresh demand. But demand repression is what a concerted decarbonization drive would produce. It is also exactly what we are seeing today. The shock of the coronavirus is offering a glimpse of the future and it is harsh.

The COVID-19 crisis drives home that high-cost producers are on a dangerously unsustainable path that can’t be resolved by states propping up their uncompetitive oil sectors. Even more important is the need to diversify the economies of the truly vulnerable producers in the Middle East, North Africa, sub-Saharan Africa, and Latin America. If that is not made a priority both by national governments and international agencies, deep decarbonization will become a formula for social crises affecting hundreds of millions of people. If their states are not already fragile, they are doomed to become so.

It would be a failure of vision to separate the current crisis from the one on the horizon. A series of makeshift interventions may assist vulnerable oil-producing countries in rapid recovery, but what they need is a concerted strategy to wean themselves off their dependence on fossil fuel exports. Otherwise, the oil counter-shock of 2020 will be no more than the first step on a path toward terminal crisis.

Nicholas Mulder is a political and economic historian and a postdoctoral associate at Cornell University. He is finishing a book about the interwar origins of economic sanctions. Twitter: @njtmulder

Adam Tooze is a history professor and director of the European Institute at Columbia University. His latest book is Crashed: How a Decade of Financial Crises Changed the World, and he is currently working on a history of the climate crisis. Twitter: @adam_tooze