How Russia will deal with US and Saudi Arabia in oil war

US, WASHINGTON (ORDO NEWS) — After the United States introduced a new package of sanctions against Russia last year, President Vladimir Putin warned that Russia would retaliate at the moment and in the place when and where it saw fit.

The withdrawal from the OPEC + agreement and the unleashing of a price war of annihilation with Saudi Arabia may seem a rather strange, perplexing way of revenge, but there is probably some logic to thi

s madness. It seems to me that the Kremlin is counting on the fact that by the end of this year it will be able not only to strike at the United States, but also to restore partnerships with Saudi Arabia.

Saudi Arabia to increase oil production at 12.3 million bpd

One of the main shortcomings of American politicians is their habit of loudly announcing their plans and strategies months or even years before their implementation, which gives their opponents a lot of time to prepare. Over the past two years, members of the US Congress have made clear that Russian gas pipeline construction projects bypassing Ukraine – the Turkish Stream and Nord Stream 2 – are under their gun.

Moscow tried to expedite the completion of these projects before the United States could introduce another package of punitive sanctions following a very leisurely legislative process. The construction of the Turkish Stream was completed just in time, and Russian gas is already flowing through it to Turkey and southern Europe.

The construction of the Nord Stream 2 could also be completed, if it were not for these annoying Danes and their environmental processes that delayed the implementation of this project just enough so that the United States could at the last minute introduce its sanctions against it. But even with this assistance in mind – and also due to a quarrel with Denmark over the possible sale of Greenland – Moscow received such an early warning about the upcoming measures that she managed to ask her European contractors to concentrate first on the most technically complex components of this branch.

Gazprom has the technical potential to complete this branch – albeit behind schedule – but the construction of Nord Stream 2 is likely to be completed by the end of 2020. Yes, this delay was quite substantial,

Oil price drops to 20-year lows

Therefore, the United States backup plan was to convince Europeans – until they completed the Nord Stream 2 pipeline – to buy more energy from North American producers. Indeed, in a new era of great power rivalry, an important component of the United States strategy is the struggle with Russia for energy markets and attempts to reduce the amount of resources that Moscow can accumulate as an exporter of energy resources.

During the Obama administration’s second term, the United States strategy was to convince Saudi Arabia to repeat its trick from the 1980s, using its ability to flood the markets with oil and provoke a sharp drop in oil prices to strike at Russian producers and force Moscow abandon her aspirations in Ukraine and Syria. Despite the fact that Saudi Arabia was able to reduce production costs, Riyadh could not afford a long price war due to the relatively high demands on the state budget. At some point, Saudi Arabia sharply changed its position, abandoning rivalry with Russia and choosing a new strategy for cooperation with Russia.

Riyadh and Moscow ultimately became the two pillars of the OPEC + agreement, which was supposed to stabilize global energy markets and establish a clear framework for energy prices. Moscow expected that in exchange for cooperation, Saudi Arabia and other Gulf states would direct financial flows blocked by American and European sanctions to the Russian economy. (Qatar’s decision to acquire shares in the Russian state-owned company Rosneft was one of the manifestations of this approach.)

However, the weakness of this approach has been the unpredictable nature of the US energy sector. American producers were preparing to capitalize on sufficiently high oil prices and fill those voids that could have formed if Russia and Saudi Arabia continued to cut production. When the United States refused to join the OPEC + agreement, the main condition for Russia’s continued participation was how actively Saudi Arabia was ready to motivate Moscow.

Over the past few months, we have seen a tightening of Russia’s position – Russia is ready to take the risk of escalation in order to gain advantage or discredit the United States. For the past few weeks, the whole world has been able to observe this trend in Syria, where Russia clashed with Turkey. The Russians crossed some red lines drawn by Ankara, then allowed Turkey to see to what extent it can or cannot rely on the United States and its European allies, and then President Recep Tayyip Erdogan went to Moscow to resume negotiations with Vladimir Putin.

Russian mining companies felt that they were among the losers as a result of the rapprochement between Moscow and Riyadh. They loudly demanded for a year that Russia withdraw from the OPEC + agreement. The panic around the coronavirus pandemic made it possible for them to state that further cuts in production under OPEC + would not prevent a fall in world prices and that Russia would continue to lose its market share.

In response, Saudi Arabia decided to convict Russia of a bluff and promised to lower prices and increase production. But Russia still has several advantages: the Russian budget is balanced at much lower oil prices than the budget of Saudi Arabia; thanks to its pipelines, Russia can quickly increase oil exports, while Saudi Arabia will need much more time to deliver its oil in tankers;

Apparently, Russia is ready to arrange a serious strength test for US mining companies as part of a long price war. Given that the Trump administration is unlikely to purchase large amounts of American oil at a guaranteed high price to replenish its strategic stock, American companies will face the prospect of much lower revenues – and have reached the point where it will no longer be feasible to maintain a business.

While some small companies will most likely be taken over by large companies whose scale can make these projects profitable, overall production in the United States may decrease. And if in January 2021, Joe Biden takes over the presidency of the United States, Americans, quite possibly, expects the return of many rules and requirements,

Why Russian oil companies are not in danger of oil collapse

Will the Saudis be more inclined to resume negotiations with Moscow? Maybe. This deal will depend on what changes will take place in the relationship between Saudi Arabia and Moscow during the lengthy price war. Crown Prince Mohammed bin Salman, who has already made opponents on both sides of the political divide in Washington, may face additional problems in the process of purchasing American goods and services in the context of price competition.

In turn, he may find that the United States will be much less willing to give security carte blanche to the Saudis. Moreover, if Russia loses its incentive to act as a deterrent to Iran, the United States has already demonstrated that they are far from always ready to attack Tehran in the interests of Riyadh. Another crisis in the Persian Gulf will not only lead to higher energy prices, but will also reinforce Russia’s claims that its “northern route” is much safer and more reliable.

So, Russia is entering this price war in the oil market, pursuing two main goals: to oust American manufacturers from business and to show Riyadh the boundaries of Washington’s support. Thanks to a team of talented people in the Russian Ministry of Finance, Moscow has reserves for a rainy day that will help it achieve these goals. Putin borrowed from the methods of conducting trade wars from Trump: be prepared to suffer short-term damage if you are sure that your opponents will have to give in. It is possible that in the coming weeks or months we will see confirmation of the effectiveness of these methods.

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The article is written and prepared by our foreign editors from different countries around the world – material edited and published by Ordo News staff in our US newsroom press.