Russia and Saudi Arabia oil war to collapse US fracking industry

US, WASHINGTON (ORDO NEWS) — The American oil industry has prepared for difficult times, not only because of the coronavirus pandemic. Starting April 1, all restrictions on oil production imposed by OPEC and in force over the past three years will be lifted, and all countries will be able to produce as much oil as they want.

The current price of $ 25 per barrel of oil can drop to $ 10. However, this is considered unlikely. But for the fracking industry, even the current price is too low to survive.

A couple of weeks ago, the Republicans launched an initiative to buy cheap oil to replenish the country’s strategic oil reserves. Allegedly, in this way support will be provided to local industry: 77 million barrels of crude oil for $ 3 billion. And the Democrats demanded to allocate billions for the development of renewable energy sources. As a result, they blocked each other.

For the first time, the American oil industry will not get anything out of the market package.

She is anxiously awaiting the development of events in the coming months: already now, the tangible consequences of the failed transaction between Russia and the OPEC states are beginning to fully provoke themselves.

At a meeting in early March, OPEC member states, given the effects of the coronavirus pandemic on the global economy, insisted on an agreement in response to falling oil demand, especially in Asia. OPEC tried to obtain from its cooperation partners led by Russia, that is, from the OPEC + group, a further reduction in production by the end of the year.

But Russia, in which few cases of coronavirus infection have yet been officially recorded, viewed the epidemic as a temporary phenomenon and was ready to extend existing restrictions only for the second quarter of this year.

In addition, Saudi Arabia, the second-largest oil producer in the world after the United States, proposed to reduce production by about 1.5 million barrels per day, and Russia should have had the most significant reduction of about 500 thousand barrels per day. Russia did not agree to this, and the deal burst. This led to a collapse in oil prices: the price of one barrel fell to $ 30, which was a record daily drop in prices over the past 30 years.

The fact is that Saudi Arabia reacted to Russia’s refusal of the deal by an instant increase in daily production to 12.3 million barrels before the beginning of April.

According to the Bloomberg news agency, Saudi Arabia has drastically reduced prices for its customers in Europe, Asia and America and is planning to significantly increase production in April – probably in order to force Russia into new negotiations. In fact, both countries are fighting for shares in the European market.

Starting April 1, all restrictions on oil production will be lifted altogether. Analysts predict a war for the cheapest oil: as a result of a price war in the oil market, world production is expected to increase by 2.5 million barrels per day and exceed the daily world demand by another 6 million barrels. For comparison: Germany alone consumes about 2.3 million barrels of oil per day.

“In April, the largest oversupply of oil that the world has ever seen in one quarter will occur on the world market and this will create an imbalance of approximately 10 million barrels per day,” is the analysis of the Norwegian analytical company Rystad Energy.

What price is acceptable

The fact that Russia did not agree to discriminate against her is not surprising. It has a trump card up its sleeve: Russia is better prepared for a price war in the oil market than, for example, Saudi Arabia or the United States. Although Russia earns more from a high oil price, a low price will not lead to a crisis in the country. It depends on the level of the minimum acceptable price, and in no other country is it at such a low level as in Russia.

Even with an oil price of $ 42 per barrel, Russia’s state budget is considered balanced, while Saudi Arabia or the United States require a price twice as high. After Saudi Arabia increased production in 2014 and Western sanctions led to an economic crisis, Russia introduced a budget rule in 2018 that regulates oil export revenues.

According to him, income from the sale of oil at a price of up to $ 42 per barrel can be used for the state budget. But all income over this mark should be transferred to the National Welfare Fund. In 2019, this fund conceived for crisis periods increased by $ 126 billion, which is about 7% of Russia’s GDP.

Russia claims to be able to withstand the price of oil between 25 and 30 dollars per barrel for six to ten years. In mid-March, Russian Energy Minister Alexander Novak even announced that Russian oil companies at competitive prices would remain competitive.

In Saudi Arabia, the situation is different. Although the cost of oil production there is one of the lowest in the world, according to estimates of the International Monetary Fund, for a balanced state budget, it requires an oil price of $ 80 to $ 85 per barrel. Since 2014, the country has been constantly living with a state budget deficit. According to forecasts for this year, the deficit will be $ 50 billion, with government spending of about $ 272 billion.

Due to falling prices, the hole in the budget is likely to be even larger. According to Standard & Poor’s rating agency, none of the Arab Gulf states will balance its state budget with an oil price of $ 40 per barrel.

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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.