CKGSB Prof Fu Chengyu Shed Light on the Impact of Oil-market Shock on the Global Economy
April 9, 2020

Watch the webinar recording

On April 2nd, Fu Chengyu, CKGSB Professor of Management and Director of the Research Center on Governance and Management of Large Corporations at the Cheung Kong Graduate School of Business, was invited to share his insights on the webinar “Impact of Oil-market Shock on the Global Economy”, which attracted over 440,000 online viewers. Professor Fu Chengyu is Former Chairman of Sinopec and former Chairman and CEO of CNOOC, with more than 40 years of experience in the oil and gas industry.

“I believe there are four forces leading to the plummet of oil prices—changes in the capacity of the international oil industry and the relation between supply and demand of the international oil market, games between super powers and geopolitics, specific pursuit and reasoning of Saudi Arabia and Russia using oil as a bargaining power and the impact of COVID-19,” explained Professor Fu on the webinar. “The growth of the US’s shale oil, due to the development of technologies to exploit it, changed the game in the global oil industry, shifting the center of oil production to the US and resulting in the change of the oil geopolitics and the supply-and-demand in the global oil industry. Oversupply of oil became a new norm mainly due to the US’s growing production of shale oil. The reduced production of oil in OPEC+ countries can hardly bring the prices up when the US shale oil is growing robustly and the demand for oil has been weak since the financial crisis in 2008. The US’s dominance over the incremental oil supply and the energy geopolitics fueled the new round of price war in the oil industry.”

With many countries locking down their borders due to the rapid spread of the COVID-19 virus, many international airlines’ growth has become sluggish and, hence, have much less demand for oil. Some analysts estimate that the demand for oil will drop 10-20 million barrels per day in April this year and will drop by 3 million to 4 million barrels per day on average for the whole year. Professor Fu suggests that we shouldn’t be too confident that the oil price will rise anytime soon, especially now that there is already an oversupply of oil.

“From my observation and analysis, I predict that the price of West Texas Intermediate (WTI) crude oil may drop to below USD 20 per barrel and then the price will rise to USD 20-23 per barrel before long and stay at that level for several months to half a year, specific timespan depending on the containment of the COVID-19,” he said. “After the epidemic is initially under control, the price may go up to USD 25-30 per barrel as the demand starts to grow when countries’ economies resume without in consideration of new agreement of cutting production to be made by OPEC+. For what we can see now the WTI price will fluctuate between USD 25-20 per barrel for less than 6 months and may increase to USD 30-40 per barrel either when Covid-19 pandemic is well controlled or 15-20 million barrels per day of production cut by OPEC+ or substantial reduction in shale oil due to collapse of shale oil companies in the United States. When the globe economy fully recovered the oil price might go up to USD 50-60 per barrel, which is a sustainable price for the oil industry. An oil price higher than USD 60 per barrel may, on the contrary, restrain the development of the oil industry and stimulate the new energy industry and the renewables industry.”

Low oil price is a good thing for oil importers like China, as it will help reduce its economic costs. However, “China now is not able to buy more oil”, says Professor Fu, “since China has already used more than 60% of its oil storage capacity before the price plummeted and its oil will not be as easily consumed due to very little economic activities during the Spring Festival and the COVID-19 epidemic. With the economic gradually recovered China can consume its previous oil reserves, buy oil futures and rent more tankers to store the oil.”

The average full domestic cost of oil production in China is above USD 50 per barrel. In Professor Fu’s view, China could produce less during this time period and buy more oil futures at the price of USD 30-40 to bring the average cost down while continuing to produce, so as to keep the mines running.

Professor Fu also shared his thoughts on the impact of the oil price plummet on private businesses and the wider economy. He believes that private companies in the oil industry may have a hard time when the oil price is low. “Private upstream service companies need to focus on innovation of technology to bring down the cost of oil companies and promote their service efficiency. The downstream oil refineries have to cut their costs to survive. Low oil price is a good thing for downstream oil companies, but weak demand on oil products and overcapacity in the downstream require companies to offer competitive prices. Low oil prices can restrain the healthy development of new or sustainable energies, but we need to look at this strategically in the long-run. As China grows stronger economically, energy security has to be considered. The growth of the new energy sector can help China with its overall economic recovery, increase investment, employment and GDP, and serve the purpose to gain energy independence.”

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