THE POLITICS OF OIL

Russia–Saudi Arabia relations - Wikipedia
(https://en.wikipedia.org/wiki/Russia%E2%80%93Saudi_Arabia_relations)

Quang Trinh

The coronavirus pandemic would create the worst global economic crisis since the Great Depression, said IMF’s head Kristelina Georgieva. In the midst of the global turmoil, friction escalates between two geopolitical powerhouses: Russia and Saudi Arabia.

The battle for arguably the world’s most important commodity, oil, should not come as a surprise. As international travel, commerce, and industrial production decline with the institution of a global lockdown, dwindling demand for oil seems inevitable. IEA’s Executive Director Fatih Birol estimates that global demand could decrease by upward to 20 million barrels a day, a 20% decrease from last year’s averages. 

From 2017, major oil producers Russia and the OPEC (collectively known as the OPEC+) went into a series of agreements to manage the global oil supply. The most recent deal goes back to December 2019 when both sides agreed on a three-month deal that would reduce supply by 1.7 million barrels a day. However, as the coronavirus outbreak throws the world economy into turmoil, Russia refused to participate in a Saudi-led plan to cut the group’s supply by a further 1.5 million barrels a day. Russian intentions can be opportunistic. The crashing oil price will surely inflict financial damages to its competitors, including the US which has risen up as the largest oil producer in the world in recent years. In addition, Russia could rely on the financial cushions that they built up since 2017 that reached half a trillion-dollar. 

As the deal broke down, OPEC lifted its limit on oil production, paving the way for oil-producing nations to flood the market coming to April. Saudi Arabia, accounting for just under 35% of OPEC oil production, is set to be at the forefront of the fight. The result is the collapse of oil prices to a level not seen since 2003.  

The Spillover 

The rift between Saudi Arabia and Russia hampers the potential for rapprochement. The two nations have seen themselves on opposite sides of the conflicts in Syria; Russia backed the Assad government while Saudi Arabia supported the Syrian insurgencies. In addition, the US-Saudi Arabia alliance has been in conflict with the Russia-friendly Iran in multiple fronts, including Yemen and Libya. The oil glut in 2014 with the rising supply from US shale producers, however, brings Russia and Saudi Arabia to the negotiating table as both struggled with an eroding oil price and lack of supply discipline. The warming of this relationship culminates in Russia joining Saudi Arabia in an OPEC+ deal to cut oil production from December 2017, a historic achievement in solving the collective action problem of overproduction. With the agreement now in jeopardy, renewed political tension might soon be underway as Russia has strived to serve as a non-aligned actor in Yemen, where Saudi has been heavily involved since its onset. 

An oil spillover, in both literal and metaphorical terms, could soon be underway. According to IHS Markit, a leading English information provider, the world might run out of place to store oil as early as June if the trend of collapsing demand and overproducing continue. Storage shock is an effective timer for each country. As pipeline companies in the US sought a cut in production with dwindling storage space, it is a race against time across the globe to adjust its production. 

An Unlikely “Coalition” 

As much as Saudi Arabia and Russia are at odds with each other, both have also stood firmly against the world. With both nations, being major oil producers, have much greater financial cushioning even compared to other oil-producing states. 

As Saudi and Russia both see the merits in collapsing oil prices to expand their market shares with their 2017 agreement, it is likely that they would be crowding out other oil producers, even to an extent that could jeopardize OPEC altogether. With oil prices plummeting further, many OPEC nations have resorted to unilateral action. Nigeria, the 7th-largest member of the OPEC the largest African producer, is effectively giving a $3 dollar discount per barrel and hopes to increase production from 2.2 million to 2.5 million barrels a day. Yet, it remains to be seen whether Nigeria’s effort would be sufficient in comparison to Saudi and Russia’s superior capacity. In other cases, scaling back is already underway. According to The New York Times, Algeria, which draws 60% of its national budget from oil and gas revenue, has cut public spending by over 30% to adjust to the new economic outlook. The Alberta administration has forced production cuts on Canadian oil companies and Brazil’s Petrobas has also scaled back operations. 

The idea should not come across as unfamiliar. Earlier this year, the US-China Phase 1 deal ties the economies of the two together through an export-buying deal. As superpowers run their own race, they might also lock themselves in a position that excludes others from the playing field. 

A Future of Uncertainty

This is not the first time that oil is at the forefront of a political battle and history shows us that the effects on the losing side can be devastating. In 1986, Saudi Arabia flooded the market and plunged oil prices by 67%, reducing US production by at least 7% in Oklahoma and Texas almost immediately and hampering output for more than two decades. While the merit of oil production can and should be contested, a shock in production would almost certain to put the half-million workers in oil and gas extraction at risk. 

As Russia gestured for negotiation while the Saudi remained resolute, it is to be seen whether the combatant of this price war and many more could make it out of the conflict unscathed. 

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s