Question

Impact of Saudi-Russian oil war on Saudi Economy

Answer 1

Saudi Arabia has kicked off an oil price war with Russia at a time when the world is dealing with the coronavirus outbreak, decimating supply chains, leading to panic buying and grounding flights. Over the past three years, Saudi Arabia and Russia have worked together to boost oil prices, but the two fell over Riyadh's demand that they agree to slash oil supplies by 1.5 million barrels per day. The reason for doing so was easy. China, the largest oil importer, turned tankers off, as the coronavirus outbreak brought the economy to a halt. Oil prices have suffered their biggest one-day fall since the Gulf War in 1991, and there is more suffering to come as Saudi Arabia and Russia flood the market with more oil

As prices increase, the 'monopoly' gains from higher income but loses market share to its 'competitive fringe' of low-cost producers who are motivated to invest in new resources. However, their response increases more production costs and makes their investment increasingly less efficient — hence making them vulnerable to a sell-off. The dominant monopoly sooner or later regains power by ramping up its own production and driving the prices off a cliff. The steeper the cliff, the better. Typically it takes some sort of shock for the dominant monopoly to get into cliff mode

Global crude stocks grew to 63 per cent of nameplate storage space by more than 100 m barrels in the previous month alone. The distribution of confinement measurements speeds up the builds. Nobody knows for sure the exact amount of full operating power because perhaps 80 per cent of the nameplate has never been tested. Considering the amount of advance planning needed to improve demand, at least initially, one would have anticipated Saudi stocks to fall as the kingdom raises supply. But since the price war started Saudi inventories have soared. This indicates that earlier this month the Russian and Saudi oil ministers stepped into their fateful meeting completely prepared for a supply surge.

The fact that Riyadh and Kuwait have recently settled an old dispute enabling them to restart long idled shared oilfields further undermines the view that Riyadh's decision was a spur-of-the-moment escalation after Russia said "nyet" to cuts in production. The sell-off will damage producers around but will offer longer-term benefits for Riyadh and Moscow. The two can handle a loss of oil revenue better than other producers due to their low costs and large financial reserves. Others are teetering now at the verge of failure. Sanctions-hit Iran is one such scenario. The real Opec prize, however, is shale oil taming. It all of a sudden appears within reach.