The consequences of the Saudi oil price war

Experts weigh in on the kingdom’s slashing of prices while demand plummets

By Dr. Villy Abraham / THE MEDIA LINE MARCH 30, 2020

A worker fills a vehicle with petrol at a gas station in Riyadh, Saudi Arabia, February 16, 2020. (photo credit: AHMED YOSRI/ REUTERS)

Saudi Arabia, the world’s second-largest oil producer, started a price war, ushered in by failed talks between OPEC and Russia. The talks were intended to address the major challenge posed by the coronavirus pandemic.

“The Saudi’s motive for cutting production was the drop in demand for oil which is a consequence of the lockdowns enforced around the world over coronavirus,” Danny Zaken, a journalist and lecturer at Sapir Academic College, told The Media Line.

Russia refused to cut production and consequently negotiations failed and the alliance between OPEC and Russia collapsed. Russia says it is waiting to see what the full impact of the outbreak will be on demand.

In response, Saudi Arabia offered unusually low prices to foreign purchasers, declaring that it would cut April’s selling price by nearly 50% (from $14 to $8 per barrel) while boosting production. Dr. Yoel Guzansky, a senior fellow at the Institute for National Security Studies, told The Media Line that “the timing is bad, leaving the Saudi economy in bad shape.”

“The decision was impulsive and is characteristic of [Saudi Crown Prince] Mohammed bin Salman’s leadership. He is an extrovert and much more liberal than his predecessors,” says Zaken.

His motive may have been to weaken the position of other oil-producing countries or to get even with Russia. Guzansky argues that it could be both, while Zaken suggests the former is the main reason. “Mohammed bin Salman is fighting for control of the oil market and OPEC” and feels it is financially able to endure lower prices.

Moscow’s revenues from oil and gas are expected to be substantially lower than expected due to the dramatic fall in oil prices. Lower revenues are likely to strike a major blow to Russia’s budget, which will incur a deficit in 2020.

Against the backdrop of the ongoing oil price war, OPEC’s output limits were placed on hold.

Consequently, the group’s biggest producers will produce more oil in order to protect their market shares. Hence, an attempt is being made to offset lower prices by increasing the volume of sales. However, this is a formidable task as the coronavirus pandemic has significantly squeezed demand. Consumers around the world are forced to stay home in a desperate attempt by governments to combat the virus’s spread. Thus, lower prices will not necessarily increase the demand for fuel.

Consequences on Regional Geopolitics

According to Guzansky, “One possible consequence of the oil price war could be the formation of an alliance between OPEC and the USA to replace the OPEC-Russia alliance.”

“The current oil price war is likely to have far-reaching consequences on global economies including the USA,” Prof. Andrew Grimaluk of the General Economic Theory and Economic Policy Department at Odessa National Economic University told The Media Line.

Prof. Nikolai Lastovenko, from the same university, told The Media Line that the economic fallout resulting from the current oil price war would be more profound than that of 1973.

Consequences on the United States

“The US is very concerned over the increase in production,” Guzansky said. “The decision by Mohammed bin Salman to decrease prices and increase the production of oil is bad for the USA.”

However, Zaken argues that, behind the scenes, the United States backs the Saudi decision to decrease production. “It’s a game of who will be in control,” Zaken said.

Consequences on Oil-exporting Countries

While Saudi Arabia’s actions are aimed at punishing Russia, they could also have negative repercussions for nations whose economies depend on oil exports, such as Venezuela and Iran, and emerging economies such as Brazil, Angola and Nigeria.

Consequences on Israel

The ongoing price war seems to be ushering in short-term gains for the Israeli economy.

According to Guzansky, “Israeli consumers will see a decrease in the price of oil on April 1, which is good for both consumers and industry.” However, in the long run, “the drop in oil prices may lead to instability in Saudi Arabia and other oil economies, which isn’t good for Israel.”