Yet Another Oil War: What is Causing the Current Tensions between Russia and Saudi Arabia?

With the chaotic events of 2020, many people may not have noticed the new conflict between the Saudis and the Russians between their oil prices and production. Since the start of 2020, oil prices have been going down in price to a record low level of 60% in 3 months. With the two countries dealing with the fallout from the COVID-19 virus, demand for crude oil has dropped rapidly. The first sign of this was back in February, when China’s demand for oil dropped by 3 million barrels per day. This, together with the drop in demand from many other countries dealing with COVID-19, has led to the value of crude oil collapsing.

Coronavirus: Opec plans output cut to support oil prices - BBC News
Source: https://www.bbc.co.uk/news/business-51753142

This resulted in a meeting being held in Vienna on March 6th between Russia and the Organization of the Petroleum Exporting Countries (OPEC), where they agreed to lower production in order to help oil prices recover. OPEC wanted Russia to reduce their production by 1.5 million barrels per day to help achieve this goal. However, even though Russia has been working with OPEC for three years, the Russian Energy Minister Alexander Novak said no to the ‘demands to reduce production’, stating that ‘it would not be in Russia’s current interest or benefit to them in the long term’.

This has led the Saudis to take aggressive action by increasing their production and flooding the market with cheap crude oil in order to punish Russia over their disagreement on lowering their oil production. Russia responded by announcing their new plan of increasing production by 25% to 12.5 million barrels per day instead of decreasing it. This in turn made their allies (such as the United Arab Emirates) also increase their production by up to 4 million barrels/day.

This ended up with many groups warning OPEC and the UAE that this will lead to a drop in profits by up to 85% in developing countries, crippling economic recovery for both them and developed countries. So why did they do this? Or more importantly, why did Russia want this?

Why is Saudi Arabia going on the offensive?

Looking back, Saudi Arabia has done this twice in the past; once in 1980 to break the North Sea’s oil producers and again in 2014 to deal with fracking. However, both times have failed – costing OPEC up to 420 billion USA dollars. One of the ideas behind the reason why they are doing it again is because they believe that they can beat Russia in its current state and keep a strong hold on the Alliance as to how much oil is produced.

Does Russia want this to happen?

According to some theories, it has been suggested that Russia wants other countries to increase their exports of crude oil and natural gas in order to cause a price crash within the market. The idea is that if the price of oil falls below 50 US dollars, many Middle Eastern countries will fall into financial crises – leaving them vulnerable to foreign influence – whilst northern European countries such as Norway, the United Kingdom and the Netherlands recover from the effects of the COVID-19 epidemic. This may make European countries more likely to stay out of Russia’s way whilst they extend their influence across the Middle East and their neighbours.

Another reason why experts believe Russia said no is that they want to cripple the United States from becoming a new oil producing superpower in the market. As a result of fracking, the US has been able to establish itself as one of the world’s largest producers and exporters of oil. However, fracking needs oil prices to be around 40 US dollars in order to remain profitable and many companies are too small and require large loans to start up; making them vulnerable to oil war tactics. This could force the US Government to put tariffs on their allies in the Middle East to keep these companies afloat during periods of low prices. This has had many experts thinking that Russia could be using this to deal with multiple targets whilst countries are busy dealing with COVID-19.

Can Russia survive this?

Yes and no. On the one hand, Russia only needs oil to be 30 US dollars per barrel to be profitable when selling and they hold one of the world’s largest supplies. With the country also having hundreds of billions of dollars in foreign assets, it can support the oil war for up to a decade according to their own sources. On the other hand, their economy is currently in decline, with wages being stagnant as oil prices go down. This could make things worse for the Russian people, which could make the government ‘back down’.

To conclude, we cannot be sure as to the true reason why both sides are on the offensive over oil. However, there is evidence to support theories that explain why both sides are trying to gain power within the energy sector in order to pursue their respective long-term prospects. With Russia trying to cripple all of its opponents during this global crisis and, at the same time, expand their influence within OPEC in order to keep oil prices where it wants them, they can further their own interests on a global scale; leaving the Saudis to focus on maintaining their control in order to realise their own economic plans. The one thing which can be said about this war, however, is that both countries are attempting to fulfil their own self interests and not ones of the international community.