The Saudi-Russian oil price war explained
It is wreaking havoc on world markets
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An oil-price war between Russia and Saudi Arabia sent more shock waves through "a world economy already reeling from the coronavirus," said Verity Ratcliffe at Bloomberg. Oil prices plunged by almost a third, the biggest drop since 1991, after Russia "refused to yield to a Saudi-led gambit to force Moscow to join OPEC in production cuts" last week. The Russian rebuff led Saudi Arabia to respond with fury, "slashing pricing for its crude by the most in more than 30 years" to roughly $31 a barrel. The gush of Saudi oil "if sustained, would savage national budgets from Venezuela to Iran, threaten the heartland of America's shale revolution, and upend politics around the world." The turmoil, on top of the coronavirus crisis, shook financial markets, with U.S. stocks plunging by 7 percent early in the week. The Saudis knew there'd be serious economic consequences, but they were not going to let Vladimir Putin bully them, said Anjli Raval and David Sheppard at the Financial Times. It's a gamble, but the kingdom had "to punish Russia for abandoning" the allegiance it had forged to "prop up the oil market since 2016."
The U.S. economy could be a big loser in this, said David Fickling at Bloomberg. American shale producers, which have helped the U.S. become a net energy exporter, still need roughly $44 per barrel to break even. American investors "have been falling out of love with crude production for a while," and they'll be reluctant to put in the capital necessary to withstand "trench warfare with Russia and Saudi Arabia." Expect shrinking and consolidation of the U.S. shale industry. Our Middle Eastern "ally" has decided to "undermine an important part of the U.S. economy at a critical time," said Daniel Larison at The American Conservative. Maybe now the U.S. will realize it "owes Saudi Arabia nothing and should stop supporting it."
No, said Bill Farren-Price at the Financial Times, this is not the Saudis' fault. Moscow started this — and "has effectively sent its tanks on to the White House lawn." Putin finally grasped what's "been haunting oil officials in Saudi Arabia" for years: That OPEC's production cuts have benefited the U.S. shale explosion, threatening Russian exports to Europe and Asia. "Moscow has taken aim at President Trump's much-vaunted U.S. energy independence" with what amounts to an "economic smash-and-grab."
"There are rare moments when the world economy seems to be reconfiguring itself beneath our feet," said Neil Irwin at The New York Times. "March 2020 is one of those moments." As major industries grapple with the spread of COVID-19, an oil-price war "could cause widespread bankruptcies in the American energy industry" and crush capital investment, since "spending on energy is a major driver of demand for heavy industrial equipment." American businesses have borrowed heavily at low rates. Their debt gives them little room to "withstand the occasional hiccup in demand or a problem with supplies." That in turn makes lenders vulnerable and raises the chance they will pull back just as businesses need money. Combined with coronavirus' decimation of consumer-driven demand, this puts "numerous industries under pressure in ways that could bounce off one another — through financial markets, to the economy, and back again."
This article was first published in the latest issue of The Week magazine. If you want to read more like it, try the magazine for a month here.