It was Thursday last week (5 March) that OPEC countries took the decision to cut oil production by 1.5m barrels a day in concerted efforts to try increasing the global market price as a response to the downward pressure which the Covid-19 virus (now classified as a pandemic by the WHO) was having on the oil industry. Not all oil exporters are part of OPEC and the Russian Government (where Russia is not an OPEC member) of Vladimir Putin was not prepared to play ball. As the 2nd largest (after Venezuela) and one of the most influential OPEC member, Saudi Arabia, in a volte-face, decided to engage in a price war with Russia. As such, as opposed to reducing supply, the Saudis decided to increase supply to 12.3bn barrels a day in April in order to try pricing the Russians out of the market. The Russians retaliated by staying that they would increase output by 500,000 barrels a day. As to whether or not this will prove a long-term strategy for either side is left to be seen.
Saudi Arabia is around twice as reliant on the oil price in order to balance its budget than Russia is, with the Saudis, according to analysts, requiring a price of around $80bn a day to break-even. The current price (as of 12 March 2020) is hovering around $30 - $35 dollars a barrel. Furthermore, oil and oil products amount to over 75% of all Saudi exports . In the case of Russia, the figure is just over 50% . Conspiracy theorists might argue that the timing of the decision by the Saudi crown-prince Muhammad Bin-Salman (more commonly known as MBS) to crack down on dissenters within the Saudi royal family is all too obvious but it nevertheless comes at a time of Saudi Arabia prepared to flex its economic muscle on the world’s oil markets. If MBS is generally serious about a long-term pricing war with Putin then he will to make sure that he has the support to do so.
The Saudi-Russian pricing war is also playing out in the wider world, with the Head of International Energy Agency, Fatih Birol, telling CNN that producers “should stop playing Russian roulette” with the oil price and calling on both sides to de-escalate. Indeed, the Russia-Saudi fall-out is having wider implications, with US President Donald Trump, indicating earlier in the week, that the United States might look for a federal aid package for shale producers in the US. The impact of the pricing war and any downturn could also have some effect on the US 2020 election, the Financial Times reported.
But, with MBS trying to consolidate his power and with Russian President, Vladimir Putin earlier this week, essentially getting the Duma (Russian Parliament) to rubber-stamp constitutional changes (subject to approval by the Constitutional court as well as by referendum) to allow him to be in power, hypothetically until 2036, Putin has also managed to strengthen and consolidate his own power-base. With the Russian state less exposed to the oil price than the Saudis, Putin might also feel that he should be able to out-play the Saudis in the short term.
This fall-out by the world’s number 2 and number 3 oil producers is not helpful especially with economic activity being affected by covid-19 and with the fluctuating stock-markets, there is every possibility that the world economy could be heading towards an economic contraction in Q1 of this year . The bravado by two world leaders is in-line with the “strong-man” ethos currently in vogue. Playing a game of “blink”, however, might work well for domestic consumption but it could have unintended economic consequences if pursued in the long-run. Global co-ordination and policy responses to the impact of Covid-19, if anything, would benefit from more co-ordination as opposed to policies based solely on state/national borders, which viruses do not recognise, nor respect.