Talking to reporters on Thursday, Kremlin spokesman Dmitry Peskov said that the Russian government has had no contact with either Saudi Arabia or OPEC since the breakdown of talks in Vienna last week, but noted that such contacts can be organized “quickly” if need be. Furthermore, the presidential spokesman noted that President Vladimir Putin did not recently contact his US counterpart Donald Trump to discuss oil markets crash either. Russian Prime Minister Mikhail Mishustin shrugged off concerns caused by the collapsing price of oil by saying earlier that the country has enough crude in stock to supply the domestic market “for many years.”
“It’s every country for themselves,”
A long-standing deal between Saudi Arabia and Russia — two of the world’s oil-producing powerhouses — fell through over the weekend, sending global markets into a spiral and dashing future economic prospects in the US. And it has almost everything to do with the coronavirus — or, more specifically, the drop in Asia’s oil consumption that’s being driven by the coronavirus outbreak there. Last week, members of the Organization of the Petroleum Exporting Countries (OPEC), a cartel of 15 countries of oil-producing nations, met at OPEC’s headquarters in Vienna to discuss what to do as the disease’s impact has lowered global demand for oil. Russia is not part of the bloc, but Russian officials were invited to the meeting. That’s because three years ago Russia made a deal to coordinate its production levels with the group, in a pact known as OPEC+.
At last week’s meeting, Saudi Arabia, the cartel’s leader, suggested the participants collectively cut their oil production by about 1 million barrels per day, with Russia making the most dramatic cut of around 500,000 barrels a day. Doing so would keep oil prices higher, which would bring in more revenue for nations in the bloc whose economies are heavily dependent on crude exports. Riyadh considered the move necessary as Asia, which is roiling from thousands of cases of coronavirus mainly in China and South Korea, no longer consumes as much energy as it did only a few months ago. China’s refineries, for example, cut their imports of foreign oil by about 20 percent last month. Lower demand leads to a drop in the commodity’s price, which thus hurts countries’ bottom lines.
The Russians, wary of such a move for weeks, opted against the plan. It’s still unclear exactly why that’s the case. Some say Russia wants prices to stay low to hurt the American shale oil industry or is gearing up to seize a bigger sliver of Asian and global oil demand for itself. “The Russians are more worried about market share and think they’d do better competing with the Saudis rather than cooperating at this point,” says Emma Ashford, an expert on petrostates at the CATO Institute in Washington. Saudi Arabia didn’t take too kindly to the Kremlin’s decision and responded by slashing its export prices over the weekend to start a price war with Russia. That brought the price per barrel down by about $11 to $35 a barrel — the biggest one-day drop since 1991. The upshot of that decision is the Saudis have positioned themselves to snatch what’s left of Asian oil demand by having a cheaper product to sell, aided by very low production costs per barrel. But there’s a big downside: The price for oil is a global one. If the Saudis tank it, as they just have, it goes down pretty much everywhere. Dwindling revenues mean global energy companies — including smaller shale-producing firms in Texas and the Dakotas — make less profit. That’s spooked markets around the world, with shares in Tokyo dropping 5 percent and a top index on Wall Street falling by 7 percent, forcing a trading stop shortly after open on Monday. President Donald Trump is unhappy with the news, of course, as a growing economy and a strong stock market are some of his best cases for reelection in November. But he simultaneously seems happy that lower oil prices mean prices at the gas pump in the US will also go down, which could potentially strengthen his electoral chances. Few can predict what will happen next, especially since it’s unclear what further effects the coronavirus may have on the global economy. What is clear, though, is that lower demand for oil and longer-term trends in the energy market have ruptured the tepid Saudi-Russia alliance for now — and the consequences will be felt everywhere, including in the United States. “At this point, it’s every country for themselves,” Emily Meierding, a Naval Postgraduate School expert on international oil cooperation, told me.il for sale and the price continued to plummet. To say that the Saudi-Russia spat was a surprise would be an understatement. “People have been expecting this kind of break for a while,” the Naval Postgraduate School’s Meierding told me, “but no one expected this to be such a dramatic break.” It’s why experts are split on the real reason for why this happened. But two schools of thought — which aren’t mutually exclusive — have emerged. The first is that Russia wants prices lowered — not propped up via its Saudi deal — to hurt the American shale industry. The immediate results seem promising, if that is the Kremlin’s true intention. Stocks for smaller to mid-size US shale companies are in free fall now, with the valuation for some dropping as much as 45 percent in recent days. This would also be a way for Russia to get back at the US for sanctioning its major energy company, Rosneft, for its deals with Venezuela last month. And there are reports indicating the US shale market was at least part of the reason why Russia walked away from the OPEC plan, as Russian President Vladimir Putin seems to think that working together to keep oil prices high would only help America. Now Moscow needs a new way forward — and it doesn’t involve cooperating with the Saudis, it involves competing against both them and the US. Russia decided to make a play for more power in the global oil market. It couldn’t do that by agreeing once in a while to cut production with the Saudis. After all, Russian firms still make money if those companies export in even at a time of low prices. The profit margin will be thinner, but they’ll still gain customers and some revenue. “It’s all about regaining market share,” says Meierding, and both countries are now in a price and production war. The problem is that Russia’s play and the Saudi response may end up hurting them both. Shares in their national oil companies — Rosneft and Saudi Aramco, respectively — have already dropped. And unlike in 2015-2016 during which China bought up a lot of oil during a period of low prices, there aren’t really any buyers like that to pick up the slack right now, as demand is dropping worldwide, Ellen Wald, an oil market expert at the Atlantic Council think tank in Washington, told me. That makes Russia’s decision likely an ill-advised one. It’s going to lose revenue in its bid to compete with America while not necessarily gaining strength in the energy marketplace. Saudi Arabia is hoping that lowering prices, which also hurts its own bottom line, will get Moscow to realize that and start cooperating again.