In early March 2020, Saudi Arabia initiated an oil price war with Russia, which resulted in a significant fall in the price of oil, resulting in a 10 per cent drop in the price of oil. The tensions arose following an implosion in the alliance between Russia and the Organization for Petroleum Exporting Countries (OPEC) which had been restraining the supply of oil since 2017 to support the prices. The tension started when Russia refused to align with OPEC’s proposal to support the price of oil by cutting production and stabilising the market amid an exponential drop in demand from China and an unstable commodities market during the coronavirus pandemic. The tensions signalled an end to the alliance between OPEC and Russia to control the global price of oil.
Saudi Arabia responded to Russia’s refusal to align with OPEC by cutting its official selling price to USD$8 to customers in Europe, Asia, and the United States (US). A drop of $6 to regain control of the oil market and place more pressure on a resource-dependent Russia.
The economic fallout of the price war has witnessed a significant reduction of government income for several oil-producing nations. Saudi Arabia, needing oil prices to be per barrel to sit at $83.80 to balance its national budget, looks to cut expenditure and increase its debt ceiling from 30 per cent to 50 per cent of GDP. The likelihood of this policy remaining increased, following both Qatari and the Abu Dhabi Emirate successful sale of a combined $17 billion worth of government bonds last week. Russia has also experienced financial issues. Initial government forecasts were projecting a surplus of $11.4 billion, following the fallout of the price war, it is now expected to run a deficit.
The oil price war had adverse effects on other oil-producing states. The Iraqi and Kuwait oil producers mimicked Saudi’s move in reducing the price of their oil, and the United Arab Emirates ramped up their oil production to maintain the balance between supply and demand. Canada, Mexico, and Venezuela have seen their price of oil fall below $5 per barrel, and as a consequence, cannot cover the production costs if this trend continues.
On the other side of the Atlantic, Norway, as Europe’s largest oil exporter, has seen a massive drop in the rate of the Krone relative to the Euro. The consequence of this decline is that the Norwegian Central Bank is planning on a currency intervention package for the first time in two decades.
In Africa, Nigeria and Angola have been disproportionately affected by the crisis. As members of OPEC, they have not announced cutting production, but need oil prices to stay at $139 for the former and $82 for the latter to achieve a degree of financial management.
At the heart of the fallout is the role of the US has played in imposing sanctions on Russia. These sanctions targeted Russian oil giant Rosneft Trading over its continued selling of Venezuelan oil. The Russian mindset in this dynamic was a targeted effort against US shale producers, in which Moscow feels they have been freeloading from the Russian and OPEC production cuts.
Observing the collapse in oil prices triggered a US action. Viewing this price war as an assault on the western economies, specifically geared towards the US and consequently making shale production a net-economically disadvantageous. The US Congress considered enacting the NOPEC Bill–No Oil Producing and Exporting Cartels Act–which has gained much attention in the last month. The bill would amend the existing Sherman Antitrust Act to make it illegal for any foreign entity to collaborate in limiting the production or distribution of oil which would be seen as interfering in the American market. Another crucial element of the bill is its removal of the state immunity shield. This would allow the US government to sue businesses, cartels, and organisations like OPEC for anti-competitive behaviour in the market.
The continued pressure by the US President appeared to make some headway late on Sunday night, via video conference. When both Russia and OPEC had agreed to slash global output by 10 per cent, the largest cut in oil production ever agreed. The agreement stands at an unprecedented level in the oil market, as its scope stretches far beyond OPEC and Russia, with the US also agreeing to cut production. Prices rose in the European markets by 4 per cent, to almost USD $33 per barrel and although the Asian market witnessed a slower growth of USD $1 per barrel, hopes are still evident as China’s apparent re-opening of the economy could see a surge in demand over the coming weeks and months.
Conor McLaughlin is a project officer at the ASEAN-Australia Strategic Youth Partnership and is a Murdoch University Endeavour Scholarship recipient