The Impact of the Russia- Saudi Arabia Oil Price War on Middle Eastern Economics and Politics
Oil production has been a great source of wealth in certain Middle Eastern nations for decades. The rise and fall of the price of a barrel of oil has direct impacts on the economic and political stability of the Middle Eastern region. Thus far, 2020 has been marked by drastic downturns for the oil market for a variety of unforeseen reasons. In March 2020, the Oil Price War erupted between Saudi Arabia and Russia, effectively dismantling what was once a stable industry. This price war, in addition to the COVID-19 pandemic, has had disastrous ramifications for oil markets and destabilized Middle Eastern economies and political systems.
Russia and Saudi Arabia are some of the worlds largest petroleum exporting states. The Russian Federation is in possession of 106.2 billion barrels of oil, which accounts for 6.3% of the world's total reserves (Stebbins, 2019). Although not a member state, Russia maintains close ties with OPEC, the Organizations of Petroleum Exporting Countries. A longstanding member of OPEC, Saudi Arabia is reported to have 266.2 billion barrels of oil, or about 15.7% of the world's oil reserves. Russian-Saudi relations have been strained for decades, with the two countries undulating between periods of peace and antagonism (Katz, 2001).
The beginning of 2020 brought fears as the COVID-19 pandemic spread in China and threatened to destabilize the worldwide economy. In an attempt to preserve the price of oil, OPEC called for its members to significantly decrease oil production (Khurshudyan, 2020). The OPEC+ agreement called for Russia to cut production by 1.5 million barrels per day (bpd) in addition to the 1.7 million bpd reduction agreed to in December negotiations (Ng, 2020). Russia refused the deal because, as Rosneft spokesman Mikhail Leontiev told Russian Media, “any OPEC+ cut would ‘clear a place’ for American shale oil”. He went on to say ''our volumes are simply replaced by the volumes of our competitors… This is masochism.” (Khurshudyan, 2020). The day Russia pulled out of this agreement there was a plunge of nearly 30% of oil price per barrel (ppb) (Khurshudyan, 2020). Saudi Arabia responded by discounting their oil by nearly 50% while increasing production, therefore instigating the oil price war (Ng, 2020). These oil production decisions rapidly began to decrease the price of oil internationally.
Oil market trading is unique in that it is a commodity. In order to buy oil stock, one must also have means to store the oil. With the ongoing pandemic, the storage of oil has become a huge concern. The world's oil consumption dramatically decreased as displayed in the above graph (EIA, 2020). Although consumption has continued to drop through Q2 2020 and is expected to reach lows of around 87 million bpd, production has not decreased to match market demand. Mohammad Barkindo, the Secretary General of OPEC, claimed that “COVID-19 is an unseen beast that seems to be impacting everything in its path… the supply and demand fundamentals are horrifying… [ and the second quarter oversupply] is beyond anything we have seen before.” (Blas, 2020). With the decrease in demand comes the increase of oil being kept in storage facilities, which are quickly beginning to reach capacity.
Throughout the month-long price war, Saudi Arabia and Russia maintained at least their regular production capacities. The price war came to an end on April 9th after nearly a month of ongoing opposition from other states and OPEC. Both countries were pressured by President Trump to decrease outputs in an effort to save the American Shale Oil industry (Blas, 2020). Both Russia and Saudi Arabia agreed to decrease their output with other OPEC+ members in an effort to revive the oil market (Blas, 2020). During the price war oil prices fell from $31 to $22 ppb, which was the ultimate driver in beginning negotiations to end the stalemate (MarketWatch, 2020). In an attempt to equalize the market, Saudi Arabia and Russia agreed to cut outputs by 8.5 million bpd, which would also help them align politically with the rest of the OPEC+ states (Blas, 2020). Once these cuts were made and the price war came to an end, the market did not bounce back as hoped.
Oil market specialists remained skeptical that slashing global supply by only 10% would have enough of an impact on the damaged supply and demand relationship in the oil market. This caused buyers to turn away from the market while sellers became desperate to get rid of their shares, and consequently prices continued to plummet (Makortoff, 2020). In the week following the end of the price war, the inconceivable happened: the oil market crashed. On April 20, 2020 the oil market closed at the lowest price in history at -$37.63 (MarketWatch, 2020). The price of storing oil had become much more expensive than the cost of oil itself, and buyers needed to be paid in exchange for taking on the cost of storing oil (Reed, 2020). The impact of this oil price collapse sent many traders and oil-exporting nations into a panic.
A cut in oil production could lead to millions of job losses as well as a stark GDP decrease in many oil-exporting nations. In Saudi Arabia the unemployment rate had been steadily declining from 6% to 5.5% in 2019, but in response to the oil price war and COVID-19 virus, numbers spiked up to 5.7% in the first quarter of 2020 (Trading Economics, 2020). This number is expected to increase as the pandemic continues and oil refineries make additional budget cuts. The future of unemployment rates throughout the Middle East depend heavily on the resolution of the supply and demand inequalities currently present in the oil market.
The oil industry is the backbone of politics in the Middle East. Along with the abundant wealth that comes from oil production comes political power and influence. Many oil-producing states have been fighting for regional supremacy in hopes of furthering their influences. The majority of Middle Eastern oil-producing states are almost solely reliant on their oil industries for business and have had severe issues when trying to diversify their economies. The oil market crash may serve as a blunt reminder of the instability and finite reality of the oil market. The future of many of these nations is in jeopardy.
The price war between Saudi Arabia and Russia intensified the impacts of the COVID-19 pandemic on the oil markets. By continuing or increasing production and lowering prices, the oil market faced inflation and began to collapse. Although the price war only lasted a month, the damage it had done to the market was too much for consumers to bear. The lack of space to properly store oil for future consumption contributed to buyer and seller panic, which eventually led to a full market collapse. The shock waves from this collapse will impact the economics and politics of the Middle East in years to come. If oil-dependent countries such as Saudi Arabia are unable to diversify their economies in the future they are leaving themselves susceptible to drastically lower GDP numbers as well as high unemployment. This opens the door for political instability from unsatisfied citizens who no longer have means to support themselves and their families. The future stability of the Middle East depends heavily upon the next steps taken in the aftermath of COVID-19. Making strides towards economic diversification should be the goal of these countries in order to maintain relative political stability and hopes for future prosperity.
Citations:
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6. Blas, Javier, et al. “Saudi Arabia and Russia End Their Oil-Price War with Output Cut Agreement.” World Oil - Upstream News, 9 Apr. 2020, www.worldoil.com/news/2020/4/9/saudi-arabia-and-russia-end-their-oil-price-war-with-o utput-cut-agreement.
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