US, WASHINGTON (ORDO NEWS) — On March 6, Russia surprised OPEC by rejecting a Saudi offer to cut oil production by one and a half million barrels per day due to a slowdown in economic growth in Europe and the United States and a sharp decline in demand (up to 20%) in China, exacerbated by an outbreak of coronavirus. As a result, prices fell 30% to $ 32 per barrel, which is the largest collapse since the 1991 Gulf War, writes Público, Spain.
The offended Saudi sheikhs reacted in an even stranger, almost “unnatural” way: they announced a reduction in oil prices by $ 5 for Asian countries, $ 6 for the United States and 8 for European consumers, who are Russia’s traditional customers. In addition, they announced that starting from April 1, OPEC countries can produce as much oil as they see fit (but you still need to sell it!), Despite the fact that the market is oversaturated and the storage possibilities are not unlimited.
Thus, Moscow (temporarily) stopped playing Russian roulette of cooperation with OPEC, which began in 2016, when it was agreed to reduce production in order to increase the price, which fell by half from $ 80. It should be noted that, although Moscow supported this reduction, prices did not rise significantly. Given that the price of oil is determined by politics, not by the law of supply and demand, let’s look at the motives of the two energy superpowers, which together produce 21 million barrels of crude oil per day.
The true motives of the Saudis
1. Collapse the Russian economy, at the same time creating favorable conditions for the shale oil of its American allies, who showed tolerance for Saudi Arabia after the vile assassination of the journalist Khashoggi by the Saudis and went in line with the requests of the same Saudis to impose sanctions on their sworn enemy – Iran. Riyadh did the same in November 1986, dropping prices by 75% to $ 10 per barrel, which inflicted a mortal blow on the Soviet economy, which could not properly respond because it was planned, and not planned, as it is now. To understand the whole politicization of this issue, it’s enough to recall how Trump, worried about the upcoming Congressional elections in November and the price of oil at $ 85 a barrel, ordered King Salman: “Reduce the price of oil now!” And having been refused, threatened: “You can lose the throne in two weeks.” And His Majesty had to lower the price to 67 dollars.
2. Amid the current economic crisis and market volatility, Saudi Arabia is seeking to regain its leadership.
3. To reduce the volume of shale oil, which the United States already produces in the amount of 13.1 million barrels per day, of which 4.15 million are exported.
4. To inflict even greater harm to his sworn enemy Iran, whose oil industry is already under US sanctions.
Motives of Russia
1. To undermine the production of shale oil in the United States, which, with current technology, will not withstand prices below $ 45.
2. Attract US customers.
3. Reduce Washington’s ability to impose sanctions on Russia: the almost completed construction of the Nord Stream 2 gas pipeline, through which Russian gas will be delivered to Europe, will not budge.
4. To expand the circle of buyers, given the absence of Iran and Venezuela on the market, as well as interruptions in oil supplies from Nigeria and Libya.
Consequences of price war
1. A price war could lead to bankruptcy and / or a violent merger of US shale oil producers and leave thousands of extractive industry employees unemployed in the election year for Donald Trump, whose energy policy is different from his predecessors. The President instructed the US Treasury to purchase significant amounts of cheap oil for the Strategic Oil Reserve in order to enlist the support of the largest Chevron and Exxon-Mobil corporations, rather than hundreds of small and medium-sized investors of shale oil companies that are either deep stuck in debt, or even went bankrupt, say, in Texas. And as a cherry on the cake, he did this when the coronavirus spreads with might and main, and most of the population in his country do not have health insurance. According to Greenpeace experts,
2. The growth of the budget deficit in Saudi Arabia: although the cost of oil production in the country is about $ 3 per barrel, the kingdom, whose budget deficit is already already $ 50 billion, requires an oil cost of at least $ 80 to balance its budget, and also continue the war with Yemen. Moreover, the Saudi authorities will have to face growing social discontent. The arrest last week of 300 people, including representatives of the nobility, the military and officials, shows the instability of royal power.
3. The free fall in shares of Saudi Aramco (Saudí Aramco) by 9%, which began to cost less than its initial public offer. This entailed: a) the discontent of thousands of citizens (about 20% of the population) who acquired the shares of the company, some even taking a loan to become its investors; b) the need to extend saving measures in relation to wages of workers; c) damage to the authority (if he ever had) of Crown Prince Mohammed bin Salman, who initiated a large-scale infrastructure development project, which was supposed to reduce the country’s dependence on oil, and now has remained without the income necessary to finance it. This game, started by a loser prince who destroys everything he touches against such a wise and cunning politician as Putin, turned out to be too risky. We will see,
4. Despite the fact that Russia has partially reduced its dependence on oil revenues and when drawing up the budget it proceeds from a price of $ 45 (Saudi Arabia always put $ 65 in the budget), low prices can affect not only its economy, but also its popularity President Putin; because it was thanks to high oil prices in the 2000s that he managed to carry out important economic reforms and gain real support from the people. Since now he intends to ask the people for an opportunity to run for the period until 2036, he needs oil worth more than $ 60.
5. Enormous damage will be caused to Iran, whose oil industry is under severe US sanctions. Iran appealed to the IMF for a $ 5 billion loan to fight the coronavirus. If this request is granted, the debt of this fabulously wealthy country by international financial organizations will become even greater.
6. There will be a fatal blow to OPEC for the following three reasons: a) now each member of OPEC can act as it sees fit; b) OPEC countries will lose billions of dollars in profit; c) Russia is being distanced from the cartel.
7. All this is beneficial to China, which consumes 13% of world oil production. And among its suppliers appear Russia and Saudi Arabia.
The war of Saudi Arabia with Russia and Russia with the United States may intensify and lead to new changes on the world’s energy map, up to the establishment of a new oil order with many unknowns.
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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.