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Should Russia really declare an oil price war against the Middle East?

March 10, 2020 at 6:55 pm

Oil tanker [Jon Olav Eikenes/Flickr]

This week we saw comparisons of the price of a barrel of oil — $30 — with the price of an empty barrel, at around $33. This is the lowest price of oil per barrel since the Iraqi invasion of Kuwait in 1991.

Saudi Arabia and Russia, two of the world’s oil superpowers, gathered with the members of the Organisation of the Petroleum Exporting Countries (OPEC) in Vienna last week as the oil markets were in chaos due to the spread of covid-19, the coronavirus. Russia’s refusal to go along with the OPEC members in cutting production has set the stage for a possible price war among the major oil producers in a rapidly shrinking market as coronavirus crosses the world. The Saudi-Russia oil alliance has become a victime of the virus.

After the collapse of the OPEC meeting on Friday, Saudi Aramco announced that it will boost its crude output significantly above 10m barrels per day in April, after a previous agreement to limit supplies agreed by the cartel and Russia expires at the end of March. This shock decision by Saudi Arabia’s national oil company was a harsh response to Russia’s refusal to agree to cut production. It is an abrupt change of strategy by a country that was until very recently trying to persuade Russia to accept a reduction of 1.5 million barrels per day in production.

The new strategy appears to target Russia and US shale oil firms, many of which are known to have high production costs and lose money when crude prices fall below $50 a barrel for more than a few months. America’s Occidental Petroleum, for example, is one of the largest such producers; it lost more than half its share value on Monday. The company needs an oil price above $40 a barrel to remain solvent.

Radically, the Saudi move will also hit the budgets of oil-dependent nations from Iraq to Nigeria. What’s more, the current level of oil prices could also reshape global politics, eroding the influence of countries like Saudi Arabia.

READ: Saudi adopts ‘shock and awe’ tactics against rivals in the oil market

In the long term, though, the only countries which will benefit from low oil prices are the likes of Turkey and India which import the commodity. Their energy bill should drop if an oil price war ensues as a result of the Saudi Aramco move.

Given that OPEC and Russia — so-called OPEC+ — have since 2016 worked together on production levels, successfully so, the break in the alliance may be temporary. The moves over the weekend may well have been part of a tense, high-stakes game, and the Saudis and Russians can still agree on a compromise. If the break lasts for any length of time, though, the experts say that there is nothing to stop oil prices from tumbling to the lowest levels in at least five years.

Both Russia and Saudi Arabia, therefore, seem to be acting for selfish short-term advantage with such risky strategies. Russia has gained significant political clout in the Middle East by aligning itself with OPEC. Helping to support oil prices in concert with Saudi Arabia and other Gulf States has helped governments such as Venezuela’s which has been suffering from lower oil prices. Now the Russians have chosen to go it alone, perhaps in the hope of undercutting US oil producers.

Yesterday, Energy Minister Alexander Novak insisted that the Russian oil industry has a high-quality resource base and a sufficient margin of financial strength to remain competitive at any forecast price level. It will also, he said, maintain its market share.

The fact is that in a war of attrition the winner isn’t necessarily the one with overwhelming power; it can also be the one with the greatest capacity to absorb losses. The rouble may nosedive thanks to a coronavirus-triggered oil price collapse. Unless Russia solves its differences with Saudi Arabia in one or two weeks, it will not avoid a collapse of its currency. A good deal between the Kingdom and Russia will, it is believed, see the price per barrel moving up to between $40 and $50 relatively quickly.

Russia in particular should take its geopolitical interests into account; it has a lot more to lose than its oil revenues. The crack in the Saudi-Russia relationship would be likely to reverse one of the most significant strategic trends of the past five years in the Middle East, and possibly destroy the re-emergence of Russia as a key actor in the region.

READ: OPEC’s pact with Russia falls apart, sending oil into tailspin

Part 2 can be found here

The views expressed in this article belong to the author and do not necessarily reflect the editorial policy of Middle East Monitor.