Saudi's Oil War On Russia: The Unexpected Consequence of Corona-virus Panic
Seizing international attention and causing worldwide panic, the novel coronavirus has indirectly been a cause of many unexpected catastrophes.
From empty toilet paper shelves to desolate airports and cities, this virus has caused its fair share of damage to the worldwide economy.
However, it seems that the biggest blow has just been dealt.
Due to coronavirus pressures, on the 8th of March, Saudi Arabia declared an aggressive oil price war on Russia.
Coming at an unstable time, this move will cripple the economies of some and answer the prayers of others.
In this article, I’ll go over everything you need to know on this issue, why it happened, what it means, and which countries will be the big-time winners or losers.
Why was this war declared?
Many countries around the world depend very heavily on their oil and gas industry. The UAE, for example, gains 77% of its state budget from this competitive market.
However, to ensure that major oil-exporting nations continue to benefit from their sales, oil prices must remain stable worldwide.
The Organization of the Petroleum Exporting Countries (OPEC) was established to guarantee just that.
Early on in the outbreak, China, who guzzles through almost 10 million barrels of crude oil a day and is considered the world’s number 1 importer, quarantined millions of its citizens, forcibly restricting their personal movements, public events, and business activities.
This, coupled with the discontinuation of major international factories and the universal limitation of transport, have all contributed to a lack of demand for oil.
In response, Saudi Arabia, the World’s largest oil and gas exporter, urged other members of the OPEC to decrease their production rate in order to meet the steep drop in demand and maintain the current market price of crude oil.
Russia, who had been trying to put an end to US oil production dominance by flooding the market with crude oil, refused to go along with the plan.
This angered Saudi Arabia who decided to go on the offensive.
Instead of decreasing their production, the Kingdom's first move was to drastically increase it to a record 12.3 million barrels a day, in hopes of flooding the market and therefore, decreasing the cost of oil worldwide.
This was followed by an announcement stating that the country would slash prices to preferred customers.
The moves shocked the energy market, with the biggest one day fall in crude since 1991.
Saudi Arabia’s direct goal? To reclaim their shares of the market.
Their indirect goal? To see Russia crack under the pressure of trying to withstand these exceptionally low prices, and to remind the world that they can destroy the global market.
Who will suffer most from this reaction?
The decision made by Saudi Arabia, especially at a time of such global instability, is far from a safe one. They have single-handedly risked the welfare of many nations across the World and have, undoubtedly, made enemies in the process.
In general, other major oil-exporting nations will be affected the worst.
Their once heavily-depended-on industry will become worthless as oil prices decrease even further, dragging down the countries’ economies alongside it.
The U.S., for example, have seen their oil prices go down by 50%, pulling many companies underwater, and creating a drag on job demand and growth.
Additionally, due to U.S. sanctions that reduce Southern America’s ability to export crude, oil is already sold at a deep discount. The collapse in international prices will mean even less cash for struggling countries like Venezuela, Ecuador, and Colombia.
But, between Saudi and Russia, it’s impossible to know who will crack first.
Unlike Russia, Gulf nations can produce oil at a lower price and, therefore, can survive selling it for cheaper.
However, the oil price Russia needs to keep its state budget balanced is lower than the one needed by Saudi Arabia and the UAE ($42 PB compared to $70-80 PB.)
So, the ball is in either nation’s court.
Who will benefit?
For there to be losers, there must be winners, and this cannot be more true in conflicts concerning oil prices.
Possibly the greatest source of wealth, oil is a major benefit for those who can produce it, and a major disadvantage for those who need to buy it.
So, countries that depend on purchasing crude oil from others will turn this dilemma to their advantage.
India, for example, will reap the most financial reward.
More than 80% of India’s total energy consumption was imported in 2018.
Falling energy prices could reduce India’s inflation and lower the cost of its import bill, improving its economy and governmental wealth.
Also, most European nations are major net importers of crude – mainly from Russia – so they will likely win when oil prices fall.
Egypt, who has already been negatively affected by the coronavirus’s impact on tourism, will gain some relief from lower oil prices.
Although it is an oil producer, the Arab world’s most populous nation is usually a net importer of crude, meaning that lower prices should benefit government finances.
Nonetheless, at a time of global stress and instability, the last thing we need is for countries to begin failing economically.
Instead of initiating child-like arguments, countries should aim to assist one another in the midst of this global crisis.
Finance should not be our top priority.
In the end, either Russia or Saudi will surrender to this pressure, but no one knows how long this might take.
Both countries have assured that they can maintain this decreasing price for a while, which will have dreadful effects on other oil-exporting nations.