RCD : On 18 March, U.S. crude oil prices fell to their lowest level in 18 years. The following day, momentarily distracted from their hype of the coronavirus pandemic, pundits and analysts reminded us again that low oil prices are the result of Saudi Arabia instigating a price war with Russia. And again, the culprit named was Mohammed bin Salman, Crown Prince of Saudi Arabia. Among his motives, they claimed, is hobbling the fracking industry that has ended American dependence on Middle East oil. Now, let’s examine the real backstory.
Weeks before a scheduled meeting of the Organization of the Petroleum Exporting Countries (OPEC), a cartel dedicated to supporting oil prices, the Saudis became concerned that the coronavirus pandemic was causing the oil price to decline. To stop or at least slow that decline, Riyadh worked to get oil-producing countries to agree to counteract falling prices with a production cut of 1.5 million barrels per day.
The Saudis were successful with OPEC and non-OPEC members, with one exception: Russia. On March 7th, it was clear that the Russians would not agree to any cut in their production, despite an existing 3-year old deal with Saudi Arabia. Riyadh then punished the Russians by undercutting prices to all their main customers – like Communist China – by increasing production by 2 million barrels per day.
On 20 March, Brent crude closed at $26.98 per barrel, far below Russia’s cost of production. Even at $40, Russia loses $100 million to $150 million per day. Goldman Sachs predicts the price will continue to drop to $20 per barrel, far below Russia’s budget needs. Analysts say that even if the ruble stays stable, Russia needs $40 per barrel, even with spending cuts and drawing on monetary reserves. With Russia’s main exports being energy and weapons, there are few other options. read more