Russian President Vladimir Putin meets the Saudi King Salman in the Kremlin
In times of a global crisis, one would hope the world would join together for the betterment of mankind to defeat the common enemy, or at least that’s the idea Hollywood would like us to believe. In actuality, this is much more challenging than the movies would make it seem, and if anything, the outbreak of the 2019 novel coronavirus (COVID-19), and the possibility of a global recession have had the complete opposite effect. Despite some cooperation abroad, we’ve seen leaders like President Donald Trump point fingers at China, blaming them for the outbreak. Regardless of the accuracy behind this claim, it reveals a larger truth that everyone is on edge, and cooperation is easier said than done. Nothing epitomizes this growing hostility among nations more than the recent and ongoing Russia-Saudi Arabia Oil Price War.
The first indication of conflict over oil prices began in early March 2020, as the Organization of the Petroleum Exporting Countries (OPEC) met in Vienna, Austria, to discuss a collective response to the coronavirus pandemic. The organization itself is made up of 14 of some of the largest oil producers in the world, including Saudi Arabia. Other countries, like Russia, attend as observers, and aim to, as a group, provide stability in the global oil market. As a result of the virus, people stopped traveling as much, causing the demand for oil to plummet drastically and global prices to fall into a tailspin, forcing OPEC to react.
OPEC officials quickly realized that global oil production needed to be cut proportionally to falling demand in order to maintain the same prices and minimize losses. However, the Russian government feared that their cooperation in this plan would only harm them economically while allowing the United States’ shale oil production to maintain its profitability. They rejected the notion, so with continued large-scale production and no sign of it coming to an end, oil prices plummeted even more. Saudi Arabia, which had undergone a substantial amount of cuts in order to convince Russia to enter the agreement, was enraged at this Russian contempt. Thus, they settled on a simple solution: if the Kremlin wasn’t going to make cuts, neither would they. So, Saudi Arabia performed a complete 180-degree turn on policy. They decided to increase their production and drop prices, attempting to corner the oil market and make things so bad for Russia that they were forced to cooperate. Russia mimicked this, albeit to a lesser degree, sparking an all-out price war between the countries and causing the cost of oil to crash by nearly 30%.
Saudi Arabia and Russia are essentially playing a game of chicken, seeing which country can maintain this production the longest. Both are heavily dependent upon oil for their national budget, so the current collapse in oil prices could prove to be very dangerous for both. Saudi Arabia has been forced to cut its spending by 5% while Russia’s currency, the ruble, has fallen over 30%. Saudi Arabia and Russia are two of the largest producers of oil in the world, ranking second and third respectively, and combined, account for nearly a quarter of the world’s oil production. Thus, their fallout has sent ripples throughout the entire global economy, wreaking havoc in non-OPEC nations as well. For instance, Norway, Europe’s largest oil exporter has seen its currency reach historic lows against the euro.
Despite these crises, other countries have enacted similar policies to Russia and Saudi Arabia in regards to economics. For example, the United Arab Emirates has increased its production to 4 million barrels per day, over 14% higher than its previous output capacity of 3.5 million barrels. As a result, the market has been flooded with oil, forcing countries like Iraq and Kuwait to largely slash their prices. Nations in North and South America have also been adversely affected but have taken a different approach. As the drilling of new wells for shale oil production is no longer profitable, the construction of these sites has been minimized. Meanwhile, large scale producers of crude oil like Mexico, Venezuela, and the US have also decreased production, as their own profitability has been diminished as well. Despite these efforts, short of nearly global cooperation, it will be very difficult for this oil crisis to be resolved.
Moreover, these effects aren’t just confined to the oil industry. This price war simply was one of numerous results of the built global economic downturn caused by the coronavirus pandemic. It has also helped facilitate some of the worst days in the history for the US and other foreign stock markets. On March 9, 2020, one day after the start of the price war on March 8, the DOW stock index suffered what was then its largest point drop in history of over 2000 points (nearly 8% of its total value). This would only be followed by worse days as the price war and the coronavirus became more severe. One week later, on March 16, the DOW lost nearly 3000 points, a drop of nearly 13% in value.
The global economy has been hit so hard recently that it’s led many economists to conclude that a global recession will likely occur, and these predictions only seem to become less theoretical as time goes on. Regardless, the current situation is unlikely to improve unless Saudi Arabia or Russia give in and cut oil production, which although bound to happen eventually, could last longer than is in anyone’s best interest. This, coupled with an apparent inability to protect against the extreme contagiousness of the coronavirus, means we should buckle up: this economic downfall will continue for a while and we’re likely only at the beginning.