ISTANBUL
‘Hegemonic stability” theorists, who claim there was relative stability in the ‘Pax-Britannica’ period of the 19th century and ‘Pax-Americana’ period of the 20th century of the international system thanks to the unquestionable superiority of one global actor in the political, economic and military fields, must be thinking that they have been proven to be right while watching the turmoil in recent years.
The strategy by the United States of abdicating from the role of an ‘actor which guarantees global stability’ which began quietly during the Obama era and continues in a much louder way in the Trump era severely weakened the global economic governance architecture and eroded their capacity to manage international crises.
Besides, trade wars, which have been launched first against China and then expanded to include other countries, have eroded the foundations of the liberal international system, which is thought to be based on the principles of free trade and fair competition.
Therefore, the multi-polar global order, under which the stabilizing forms of intervention that we used to see in the unipolar or bipolar world order have become history, has provided the basis for different actors to pursue far harsher and confrontational tactics and strategies to defend their national interests. On the one hand, political and military conflicts in different parts of the world have intensified over proxy wars, while on the other hand, international competition in the context of energy resources or economic and technological superiority factors has become increasingly disruptive.
Energy wars before getting over with epidemic nightmare
It is necessary to evaluate the fact that the year 2020, which we are at the beginning of, is arguably the most turbulent period in the world economy since the global financial crisis in 2008 with the shocking developments that have occurred one after the other in the context of the developments outlined above in the international system.
The novel coronavirus outbreak, which has caused public health concerns and brought daily life and human mobility to a standstill in many countries, has triggered serious concerns, while the pressure of the U.S.-China trade wars was reduced by mutual negotiations and an attempt to reach a solution. While the outbreak was thought to be limited to China and East Asia at first, the U.S., Europe, and the Middle East became a global health risk, triggering significant contraction trends in both the production and demand side of the world economy. The lack of support by a strong international coordination network for measures taken in the face of the coronavirus threat and steps taken to counter its potential economic impacts underscored the weakening of the global governance mechanisms. Then, while the long-term effects of this outbreak on the world economy have not yet been made clear and assessments and common response mechanisms have not been established, shocking news emerged from international oil markets -- the flare-up of energy war between Russia and Saudi Arabia over setting global oil prices and market sharing.
In fact, in light of the global economic slowdown caused by the coronavirus outbreak and the decline in demand for oil, the talks that started in Vienna to prevent international oil prices from falling were seen as a continuation of a fairly routine process. The OPEC-Plus (OPEC+) mechanism established in 2016 to determine the global price level by controlling oil production volume between Saudi Arabia, which is the de facto leader within the Organization of Petroleum Exporting Countries (OPEC), and Russian authorities representing non-OPEC producers have been in operation for some time. Under the agreement, the parties discussed possible cuts every six months and went to coordinated cuts to prevent oil prices from overvaluing international markets.
By the logic of a multipolar world order with the United States abandoning its role as the stabilizing factor in world energy markets, focusing on its national interests and developing ‘shale oil' technology to become the largest oil producer have made the picture more complex.
The first rift in the OPEC-Plus Group has emerged between Russia, which reported adjusting its budget balances to an oil price of $40 a barrel by mid-2019, and Saudi Arabia, which needs prices to rise to close its severe budget deficits. After nearly a month of tough talks, Moscow has consented to production cuts, but the first signs of a storm breaking soon have emerged.
The Moscow-Riyadh duel
However, demands for additional production cuts, which have been voiced for some time in the face of a slowdown in the world economy caused by the coronavirus outbreak and falling oil demand, were expected to be decided at the latest talks in Vienna. The general belief was that in such a critical international conjuncture, the leading players in the global energy sector would leave their differences aside and make decisions in the direction of common interests.
But the Russian side's demand for production cuts and its desire to retain its share of the markets it dominates at the expense of continuing the fall in global oil prices has severed the ropes in energy diplomacy.
Saudi Arabia, which pays great attention to the fact that global oil prices do not fall below a certain level because about 80% of its budget revenues depend on oil, reacted very harshly to Russia. The Putin administration, which is playing energy chess easier, has been challenged as less of its budget revenues (38%) depend on oil, a strong asset fund has been established with accumulated revenues and central bank reserves have relaxed its hand.
The Riyadh administration has announced that no pre-planned cuts in oil production will be made, but rather that daily production of 9.7 million barrels will be increased to 12.5 million barrels. Besides, Saudi national oil company Aramco announced that it would implement price cuts at $4-$6/barrel for its Asian customers and $6-$8/barrel for its European customers.
On the one hand, increasing oil supply to global markets where demand is already falling and on the other hand, price cuts to Asian and European markets where the Russians have a significant market share meant opening a Pandora's box in the context of the energy wars. The price of Brent-type crude oil per barrel, which is the indicator of global markets, has dropped from $50 on March 5 to less than $30 on March 9, bringing it to a level below production costs for many producer countries.
The longer the duel between Russia and Saudi Arabia continues, and the more damaging the price wars in global oil markets will be, the more we will continue to monitor them in the coming days.
Everyone will have to take care of themselves
However, in today's conjuncture, where oil prices are financialized along with other commodities and are shaped not only according to supply-demand conditions but also according to the economic conditions of the global economy and the dominant producers, it was inevitable that the energy wars would have a profound shock effect on international capital markets.
In this context, price wars in the energy sector triggered a violent upheaval on March 9, which has been described as ‘Black Monday,’ further raising concerns and obscurity in global markets over the coronavirus outbreak. Japanese stocks fell more than 6% following the Asian opening while European markets, already jittery with the effects of the coronavirus in Italy, suffered bigger declines. In the U.S., the S&P 500 index fell around 7%, while 'unicorn' technology companies such as Amazon and Microsoft faced value losses that reached $5-$6 billion in a single day.
After many years, trading on the U.S. stock markets had to be decelerated, while 10-year U.S. Treasury bond yields were below 0.5% for the first time.
In this climate of global upheaval, investors have opted to cling to instruments such as gold, the Japanese yen, and Treasury bonds, which they see as safe havens. The U.S. Federal Reserve is widely expected to try to calm the market panic and avert an economic slowdown by cutting policy rates by 50 basis points at its regular meeting in April. However, it is unclear how effective these interventions with monetary policy tools can be in overcoming the global recession in the long term.
If we look at all these events in terms of long-term changes in global governance structures, today's conditions, in which no leading actor in the multipolar order wants to take on the role of the ‘stabilizing power,’ provide a suitable basis for spreading global political and economic crises.
The diversification of trade, exchange rates, technology and energy wars among actors who are pursuing extremely tough international competitive strategies while pursuing their national interests suggests that a crisis period is on the horizon when the world economy will face shrinking pressures on both production and demand.
The worst thing is that, unlike previous crises, this time there is no longer a virtuous global hegemonic force willing to act as a protector of liberal capitalism, albeit at a rhetorical level.
Everyone will have to take care of themselves in the long run. It will be useful for developing countries such as Turkey to develop medium and long-term strategies, taking into account the potential challenges of this turbulent global conjuncture.
* [Prof. Dr. Sadik Unay is a faculty member of Istanbul University Faculty of Economics.]
* Opinions expressed in this article are the author’s own and do not necessarily reflect the editorial policy of Anadolu Agency.
* Translated by Merve Dastan
