Saudi-Russia oil price war has high stakes but what is the reward?

The price war, although started by Saudi Arabia and Russia, seems to have revived the historic battle of oil market dominance between OPEC+ and the US.

The global fuel demand in 2020 is expected to shrink for the first time in almost a decade but that’s not the biggest cause of distress for producers. Despite the low demand, two major oil producers, Saudi Arabia and the United Arab Emirates have vowed to raise output to record high in response to a standoff with Russia that has hammered crude prices in recent days.

A 2016 deal between major oil producers to cut output collapsed last week triggering the calls for increasing output and slumping the prices. It started as a standoff between Saudi Arabia and Russia but was quickly joined by the UAE as other producers tried to cool off the tensions arguing that increased output would not be in anyone’s favor and the tremors would be felt far and wide.

While Russia and Saudi Arabia are big producers with oil production of both the countries running above 10 million barrels per day each, smaller producers including private companies and even some countries, might need to take drastic steps to survive.

Saudi Arabia relies highly on oil but also claims to have lower production costs than any other producer and can absorb the financial losses due to lower prices for quite some time.

Russia, on the other hand, recently claimed that its oil-wealth reserves in the National Wellbeing Fund are “sufficient to cover lost revenue if oil prices drop to USD 25 to USD 30 a barrel for six to ten years.”

So, who loses?

The United States oil industry seems to be the indirect target in this oil price war. It is the biggest producer in the world but its oil industry is more crowded than Russia and Saudi Arabia.

Apart from government-controlled production, the US oil industry also consists of small and big private players. Saudi Arabia’s oil, on the other hand, is dominated by state-owned Aramco and although Russia has private players, its market is not as crowded as the US and the government controls a significant portion of the market.

Without any subsidy or government support, small US shale companies would be the first to get hit due to the price war and even big companies would be rushing to cut dividends and expenses to stay afloat. And the impact is already being felt, Occidental Petroleum recently announced that it would cut its dividend by almost 90 percent from USD 0.79 per share to USD 0.11 per share “to succeed in a low commodity price environment.”

The smaller oil-producing countries have also sounded an alarm over falling oil prices. The Nigerian finance minister has already acknowledged the possibility of spending cut saying “there will be reduced revenue on the budget and it will mean cutting the size of the budget.” Canada’s energy-rich Alberta is also expecting layoffs by energy companies, its premier Jason Kenney said on Wednesday.

Other oil-producing nations like Venezuela, Iran, and Libya also face a serious risk especially due to political tensions at home and complications in quick implementation of any damage control measures.

Does anyone win from the price war?

Saudi Arabia is the oil market’s ‘swing producer’ and has the most oil production capacity kept in spare, which means that it also has the capacity to deliver the most fatal blow to other players. The de-facto leader of OPEC has often complained about implementing much bigger cuts than others to prop up oil prices.

The kingdom has been pushing all producers for deeper oil cuts from the past several years but Russia argues that curbing production only gives more market share to US players.

“We, yielding our own markets, remove cheap Arab and Russian oil from them to clear a place for expensive American shale. And to ensure the efficiency of its production. Our volumes are simply replaced by the volumes of our competitors. This is masochism,” Russia’s state-owned oil giant Rosneft’s spokesman Mikhail Leontiev told Ria Novosti news agency over the weekend.

It is not the first time that the American shale industry has been blamed for undermining OPEC+'s production cuts and the price war seems to have revived the historic battle of oil market dominance between OPEC+ and the US. Although started by Russia and Saudi Arabia, US shale producers could be the biggest, yet indirect, targets of the war.

(Disclaimer: The opinions expressed are the personal views of the author. The facts and opinions appearing in the article do not reflect the views of Devdiscourse and Devdiscourse does not claim any responsibility for the same.)