Black swans, grey rhinos and the global oil market
Once upon a time there were “black swans,” a term used by Lebanese-American scholar, statistician and risk analyst Nassim Nicholas Taleb to describe unknown unknowns — unforeseeable, or highly improbable, risks. Now, there are grey rhinos, a metaphor coined by risk expert Michele Wucker to describe “highly obvious, highly probable but still neglected” dangers.
Will Russia’s resistance to oil production cuts, in defiance of Saudi Arabia and the wishes of OPEC, be a grey rhino rather than a black swan?
Until Russia’s refusal to accede to production cuts, the global oil market was suffering the effects of falling demand on account of the coronavirus outbreak. Traders had warned that global oil demand in 2020 could contract for the first time since the 2008 financial crisis. The microbe was the black swan, an event that was hard to predict and whose consequences were — and remain — incomputable.
Even so, the hope was that the 4-year-old OPEC+ coalition of oil producers, which includes Russia, would continue to work in terms of supply management. After all, OPEC+ had dealt consensually with the effect on crude prices of rising US production and a trade war between the United States and China.
With the novel coronavirus spreading and analysts forecasting the worst year for oil demand since 2008, Riyadh remained hopeful Moscow would agree to deeper production cuts. Ahead of the March 6 meeting in Vienna, the Russians hadn’t ruled out the possibility but argued the case for American shale producers to share the pain. In other words, there was no grey rhino on the horizon.
At the time, it didn’t seem highly probable that Moscow would blow up its partnership with OPEC and condemn the energy sector to a price crash and major oil exporters to a decisive brake on growth.
Then Russia said it would not cut production any further and the Saudis responded with a threat to discount crude and boost output. This led to the March 9 price crash, crude’s biggest one-day fall since the 1991 Gulf war. A grey rhino of sorts had suddenly materialised but it still wasn’t quite the way Wucker, a policy analyst who specialises in crises anticipation, categorises this type of risk. It wasn’t obvious, just a nascent danger.
Technically, it was well within the grey rhino range. Tensions had been building even in the years that Russian President Vladimir Putin kept his country within OPEC+. Moscow had been increasingly incensed that production cuts agreed with OPEC were allowing American frackers to add millions of barrels of oil to the global market.
Meanwhile, the Trump administration was using US energy clout and economic sanctions to meddle in Russia’s affairs, notably the attempt to prevent the completion of Nord Stream 2, a pipeline linking Siberia’s gas fields with Germany. The United States also targeted the Venezuelan business of Russia’s state-oil producer Rosneft.
Increasing Russian anger towards the United States could justifiably be taken as the first glimpse of a grey rhino, an obvious danger to the status quo. After the OPEC+ breakdown, a Rosneft spokesman insisted that “the total volume of oil that was reduced as a result of the repeated extension of the OPEC+ agreement was completely and quickly replaced in the world market with American shale oil.”
Unsurprisingly, then, Alexander Dynkin, head of a Russian state-run think-tank, diagnosed Russia’s behaviour as an obvious response. “Of course, to upset Saudi Arabia could be a risky thing,” Dynkin said, “but this is Russia’s strategy at the moment — flexible geometry of interests.”
That flexible geometry adds to the risk of the global oil market being turned upside down. With the Saudis displaying a willingness to take on Russia, cratering oil prices are infecting markets everywhere. If oil stays low, it’ll eventually eat through national budgets from Venezuela to Nigeria and Iran. US shale producers, who have been soaring high on borrowed cash, will be affected, too, but supply is not likely to fall for at least six months.
Add to that OPEC’s doleful forecast of March 11 that there will effectively be no growth in global oil demand this year. Barely a month ago, it said fuel consumption would increase by just less than 1 million barrels a day — 1% — in 2020. Now, the group expects an increase of 60,000 barrels a day.
That makes sense, at least in conventional terms, but what if the black swan and the grey rhino unite to produce a black rhino? Rock-bottom oil and gas prices could conceivably affect renewable energy projects and prevent the transition from fossil fuel. Cheaper oil may delay the guillotine for oil. That may delay any meaningful effort to deal with climate change, past the point of discernible effect. That would be the blackest swan of them all.