BrazilGlobal oil & gas companies brace for trade war fallout
Global oil and gas companies are facing an uncertain future as tensions rise between major economic powers, particularly the United States and China. Oil prices are currently low due to pressures on both the supply and demand sides and a number of scenarios could play out, according to a report from Oliver Wyman.
Trump’s wide-ranging tariffs have already pushing down oil prices, which are currently hovering around $60 a barrel. But it is not just tariffs that are causing trouble – increased oil production from the OPEC+ countries and general uncertainty about how much oil the world will need are adding to the pressure.
Will countries quickly make peace, easing the pressure on oil markets? Or will we see a world split into separate trading blocs with high tariffs, leading to very different oil prices in different regions?
The report from Oliver Wyman, a global management consultancy firm, lays out four distinct scenarios:
1) A deal is made
One potential scenario would see a diplomatic breakthrough, resulting in the resolution of outstanding trade conflict. Indeed, some countries have actually already decided to take a seat at the negotiating table with the Trump administration to hash out a deal.
A relaxation of tariffs and revival of trade flows would help rebuild confidence in global commerce. That could mean modest growth for the global economy, with oil prices stabilizing around $65 to $70 per barrel as demand recovers.
This is obviously an optimistic scenario, which could be seen as unrealistic considering the current state of affairs. Even in the case of a similar scenario coming to pass, global supply chains may seek to diversify and pursue strategic autonomy.
2) Decoupling leads to high tariffs
In this scenario, a new normal emerges in the short-term – even potentially in the 90 day pause period – in which higher tariff rates stay in place on a broad range of sectors and countries. The clarity in this scenario allows businesses to plan effectively, but the high tariffs hurt business and create a more fragmented global economy, with trade dividing into defined blocs.
The West would strategically decouple with China and tariffs become permanently entrenched across multiple sectors. Strategic value chain localization becomes a priority, with a renewed focus on regional alliances reducing external dependencies.
Going forward, economic growth would vary significantly by region, with some regions thriving and others left struggling. The dollar would remain relatively strong against emerging market currencies, but could lose global reserve status. Global markets would be generally more fragmented.
3) Uncertainty continues
In this more pessimistic outlook, negotiations on tariffs would drag out for many months and businesses would face serious challenges in planning adequately. This scenario would see difficult (or potentially failed) negotiations between China and the US – if any negotiations happen at all, that is.
Global economic growth would slow down, but a dramatic downturn could likely be averted. Oil prices would be subject to more volatility as market participants struggle to price amid all the policy uncertainty. The cohesion of OPEC+ would be tested as members respond differently to shifting market conditions.
This environment of persistent uncertainty would force businesses to maintain multiple contingency plans, increase operational costs, and delay major investments.
4) Full-blown trade war
The most challenging and ‘doom and gloom’ scenario would be a prolonged period of uncertainty in which escalating tariffs are shot back and forth, negatively impacting a wide array of sectors. Negotiations would falter, especially between the US and China, and separate trade blocs would emerge along the lines of opposing spheres of influence.
Many analysts foresee increased stress on the global economy in this scenario, possibly accompanied by stagflation – a toxic combination of low growth and high inflation. Oversupply of oil could further complicate the demand challenge.
The U.S could push to increase domestic production through aggressive permitting, part of what could emerge as an attempt to control inflation through lowered energy prices. There could also be a return of Russian energy to Europe. Oil prices could plummet but later experience extreme volatility as supply chains fracture and regional supply-demand dynamics decouple.
Adaptation
For national oil companies, the name of the game is adaptation. Companies need to figure out how to navigate these uncertain times and protect themselves from potential losses. This means carefully considering each of these possible futures and developing flexible strategies that can be adjusted as the global trade landscape shifts.
“The global oil and gas industry is at a critical juncture, facing significant challenges from escalating trade tensions,” said Nadim Haddad, partner and global head of the Oil & Gas practice of Oliver Wyman.
“By understanding the potential scenarios and developing strategic responses, oil companies can enhance their resilience and position themselves for long-term value creation. The outlined strategies provide a foundation for navigating current turbulence while building capabilities for an increasingly complex global environment.”
