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24.03.2020 Author: Salman Rafi Sheikh

Riyadh’s “Oil War” on Russia has some Global Objectives


The on-going Saudi ‘oil war’ with Russia has its roots in the logic of increasingly using natural resources for geo-political and geo-economic purposes. While this is not something entirely new, the latest push comes against the backdrop of increasing competition between the US and Russia for global leadership roles and the former’s attempts at forcing the latter out, squeeze its share in the global oil market to increase that of the US shale oil, thus denting Russia’s economic capacity and its ability to project power in regions beyond its borders.

Whereas the Saudis blame Russia for the ‘oil war’ and Kremlin’s refusal to further cut oil production, the proposed cut, as it stands, would have ultimately meant a further decrease in Russia’s share of the global market and a significant increase in the US’ shale-oil production and exports. Ever since OPEC+ agreement of 2016 and the related cuts in oil production, the output of US shale oil has soared by 4.5 million barrels a day. Whereas the Western political pundits have been speaking and writing of Russia as the ‘malign’ player targeting the US’ ‘booming’ shale oil industry, the fact of the matter is that the US shale industry would not have grown in the first place if there had been no OPEC+ agreement. Russia, as it stands, has only refused to further cut its production, and is willing to extend the OPEC+ to continue a stable system of oil production.

How the OPEC+ benefited the US shale oil is evident from the fact that balanced production of crude oil meant stable and high prices, which made the US shale oil more profitable, further allowing the US to use the scenario to build its production and export infrastructure. As it stands, since 2016 when the OPEC+ deal was struck, US oil exports have increased five-fold and shale production increased from 8.9 million barrels per day to 13.1 million barrels per day. Thus, to a significant extent, by refusing the Saudi proposal of further cuts in oil production, Russia essentially refused to allow the US shale oil industry a further free-way for global expansion.

At the same time, Russia continues to stick with the OPEC+ deal. The Russian Prime Minister Mikhail Mishustin has said,

“We did not initiate the withdrawal from the agreement [OPEC+ deal]. On the contrary, we proposed to extend the agreement on the existing terms, at least until the end of the second quarter or for a year, so as not to complicate the situation that has developed with the spread of coronavirus.”

At the recent meeting between Russia’s Putin and energy officials, Putin reportedly said that:

“OPEC+ has “proved to be an effective instrument to ensure long-term stability on global energy markets. Thanks to that, we have obtained extra budget revenues and, what is important, provided a possibility for upstream companies to confidently invest in promising development projects.” 

What becomes evident here is that the blame for reduced oil prices can hardly be put on the Russians. Its roots lie in the global struggle for market share. This struggle is taking place at two levels. The first is between the Russians and the Saudis whereby the latter, known for playing on the US side in every war, want to expand their share of the market to sustain their massively oil-dependent economy. The second level, linked as it is with the first, is again about reducing Russian share of the market and allow for the shale-oil to expand. Since this expansion will theoretically come at the expense of Russian oil, the Saudis would still benefit.

There is as such a Saudi-US consensus behind the dropped oil prices. The US President Donald Trump spoke on the phone to the Saudi Crown Prince Mohammed bin Salman on the eve of the Vienna meeting, and their subject of discussion, according to the White House, was the “energy market.”

That the US and Saudi Arabia have a deep interest in squeezing out Russia’s share of global hydrocarbon market is evident from the way the US has been trying to block and even sanction the joint Russian-German Nord Stream-2 pipeline project.

Who will win this war? Unlike the Saudis, Russia’s economy does not solely depend on oil prices, although it still does play a significant role in enabling the Russian government to fulfil its budgetary commitments. The Saudis would be thus at a loss much sooner than the Russians. If the US president called the Saudi ruler to discuss the “energy market” and it was mainly about finding ways of squeezing Russia, it was equally about finding a way to stabilise oil prices because the continuously falling oil prices would only make shale-oil companies suffer loses. According to a report of Bloomberg, “The US shale sector is getting completely killed. A complete bloodbath. Billions of dollars in equity wiped out.”

Whereas some in the West think that this is a Saudi-Russian project to destroy the US economy, this is not the case; for, if both oil producers had wanted this, they could have done this by doing a new OPEC+ deal in a way that would have allowed cut in prices and still maintain production levels at agreed levels. This has not happened, and given the nature of deep Saudi interests in the US, it is difficult to conceive of a Saudi project to ‘kill’ the US economy. What it signifies is an attempt at squeezing Russian share of the market. This explain Saudi proposal for cutting oil production (and thus allowing that of the shale-oil grow further). The falling oil prices only indicate that the project is failing; Russia is resilient and have enough reserves to sustain itself for a decade.

Salman Rafi Sheikh, research-analyst of International Relations and Pakistan’s foreign and domestic affairs, exclusively for the online magazine “New Eastern Outlook”.

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