The Saudi Arabia-Russia Oil Price War

Written by Nathan Lim

(Chart source: CNBC)

Key Vocab:

petrostate: A state whose wealth stems from the sale of oil.

dividend: A sum of money paid regularly by a company to its shareholders out of its profits (or reserves).

OPEC: The Organization of Petroleum Exporting Countries is an intergovernmental organization comprised of 14 different oil-producing nations.

With the coronavirus pandemic taking its toll on the world, many unexpected changes are happening throughout the globe. In China, quarantine measures led to a decrease in their refinery oil consumption by 20% in February (Washington Post). Because China is a major consumer of the world’s oil, this change in consumption sparked many problems in the oil industry, especially since prior to the outbreak of COVID-19, analysts were predicting an increase of 700 million oil barrel sales a day over the rate from a year ago.

In early March, the Organization of the Petroleum Exporting Countries (OPEC) met in Vienna to discuss what action should be taken to align with the fall in global demand for oil. Although Russia is not part of OPEC, Russian officials were invited to participate in the meeting because of a pact made three years ago, known as OPEC+,  which coordinates Russian production levels with the rest of the countries.

According to CNBC, “[m]arkets had been hoping for an agreement between [Saudi Arabia] and [Russia], as well as other OPEC and non-OPEC producers, in order to deepen oil output cuts and prop up prices… The group’s unexpected failure to reach a consensus on production policy led oil prices to crash on [March 9th].” Saudi Arabia wanted to decrease oil production in order to line up with the decrease in demand and keep oil prices up, but Russia declined to make the proposed cuts. A decrease in oil production to maintain higher prices would mostly benefit countries that heavily depend on the sale of oil for their economy. In response to Russia’s decision, Saudi Arabia decided to slash oil prices in retaliation and increase production rates to gain market share. Subsequently, Russia followed along with Saudi Arabia’s decrease in prices and increase in production rates, claiming that they “could withstand lower oil prices for as long as a decade” (CNBC). Emma Ashford, an expert on petrostates at the CATO Institute, says that “The Russians are more worried about market share and think they’d do better competing with the Saudis rather than cooperating at this point” (Vox).

This dramatic decrease in oil price can cause many problems for both Saudi Arabia and Russia. “Russia stands to lose a considerable amount of money by not endorsing the proposal,” said Tamas Varga, a senior analyst at PVM Oil Associates (CNBC). Some OPEC countries without a diversified economy that depend on oil exports, like Iraq, are also facing very big issues. Many American consumers will benefit from this price war and even President Trump made a tweet celebrating the low prices: “Good for the consumer, gasoline prices coming down!” (Twitter). However, some Americans will also take quite a financial hit from the conflict between Saudi Arabia and Russia. People in the American oil industry are facing problems, as according to CNN, the entire industry is being forced to cut budgets, decrease dividends, and prepare to lay off jobs. In states like Texas, where the oil industry makes a large portion of the workforce, many jobs are at risk.

This oil price war connects to multiple course themes. The theme of whether history is shaped more by individual people or systemic forces beyond any one person’s control is prominent in this story because the root cause of this whole conflict is arguably coronavirus, a disease which is spread without control from any individual. Another notable theme that this connects to is the question of how intergovernmental organizations, non-governmental organizations, multinational corporations, and non-state actors have challenged the primacy of states in the international system because OPEC wanted Russia to decrease production of oil and retaliated against Russia once they declined the proposal.

On the brighter side of things, chief executive of Russia’s sovereign wealth fund RDIF Kirill Dmitriev claims that Russia and Saudi Arabia are “very, very close” to a deal to cut oil production. “I think the whole market understands that this deal is important and it will bring lots of stability, so much important stability to the market, and we are very close… [Putin] talked about how important this oil deal is, so Russia is committed,” said Dmitriev (CNBC). Clearly, Russia currently acknowledges the significance and urgency of a production cut deal. A meeting is scheduled to occur this week, and hopefully the Saudi Arabia-Russia oil price war will soon come to an end.

Discussion Questions:

1. What are some other unexpected impacts that COVID-19 has had on the world?

2. How can a desire for retaliation and/or an overly competitive attitude be detrimental for a nation?

Full list of sources:

CNBC: The losers — and even bigger losers — of an oil price war between Saudi Arabia and Russia

Vox: The Saudi Arabia-Russia oil war, explained

CNBC: Oil set to ‘crater’ Monday as OPEC meeting delayed, tensions flare between Saudi Arabia and Russia

CNBC: Russia and Saudi Arabia are ‘very, very close’ to an oil production deal, says Russia’s Dmitriev

Washington Post: OPEC will slash oil production — if Russia does, too

CNN: How America can fight back in the oil war with Russia and Saudi Arabia