Analysis: Coronavirus pits Russia, Saudi Arabia and the U.S. — world’s top energy producers — in a destructive price war

Pump jacks draw crude oil from the Long Beach Oil Field in Signal Hill, California, on March 9, 2020. Global stocks and oil prices rebounded on March 10, 2020 on hopes of US economic stimulus efforts as the coronavirus rages, one day after suffering their biggest losses in more than a decade.   | Photo Credit: AFP

The sudden meltdown of oil prices following the COVID-19 pandemic has pitted Russia, Saudi Arabia and the United States — world’s top energy producers — in a destructive price war.

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In the end, the downward price war spiral is likely to embrace Eurasia, led by Russia and China in a tighter power struggle with the U.S.-led West. It could also be a breakout moment aiding the emergence of a multi-polar world order, where the global power is more evenly distributed among, some old, including the U.S. , and several new stakeholders, riding on the reassertion of Eurasia.

“The COVID-19 and the collapse of oil prices have undermined global supply chains that had evolved during a dying era of globalisation. Only self-sufficient societies will be able to overcome such a serious challenge, leading to multipolarity as the only option,” says Alexander Dugin, a Russian author, also known as Russian President Valdimir Putin’s “brain,” in a conversation with The Hindu.

The precipitous overnight drop in oil prices — from West Texas Intermediate (WTI) down to $33 per barrel on Monday, after selling at $45 last Thursday — followed the collapse of the OPEC+talks with Russia over the weekend. When the Russians refused to cut back supply as demanded by cartel’s leader Saudi Arabia, apparently to stabilise prices in a shrinking COVID-19 hit market, the OPEC+alliance to coordinate energy flows outside the U.S. imploded.

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Amid the bitter Russia-Saudi Arabia spat, Riyadh announced that it would step up supplies, to secure shrinking market share, despite the inevitable collapse in the prices in a world awash with oil, as none of the OPEC suppliers and Russia would now be constrained to curtail output by artificially defined quotas.

But behind the Saudi-Russia clash, a bigger back story was also unfolding, embracing Washington and Moscow, surrounding the geopolitics of the under-construction Nord Stream 2 gas pipeline that is to transit Liquefied Natural Gas (LNG) from Russia to Germany.

In December, the U.S. passed a provision linked to the National Defence Authorisation Act (NDAA), which would sanction any vessel serving Gazprom, the Russian energy giant, in laying the Nord Stream 2 pipeline along the Baltic Sea. That led Switzerland’s Allseas Group to immediately withdraw from the project,

The U.S. opposes this pipeline as it increases Europe’s energy reliance on Russia. The pipeline also bypasses Washington’s key ally Ukraine, on Russia’s doorstep, denying Kiev lucrative transit fee and political leverage over Moscow.

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The Russians have argued that by denying Moscow energy access, the U.S. is securing its own LNG footprint in Europe, following the shale gas revolution . In June, U.S. President Donald Trump had exhorted Germany that instead of buying Russian piped gas, Berlin should purchase U.S. LNG.

But following the weekend decision to walkout of quota restrictions, the Russians have breached a giant hole in the U.S. energy fortress. By driving prices to $33 a barrel, the Russians have hammered the U.S. shale industry badly. “Not one company in our coverage can keep production flat for more than a few months while spending within cash flow at $35 WTI,” Bloomberg quoted Charles Meade of Johnson Rice & Co. as saying.

“There will be many bankruptcies in our industries and tens of thousands of layoffs over the next 12 months,” Scott Sheffield of Pioneer Natural Resources told the Washington Post.

Unsurprisingly, shale stocks plunged on Monday, with heavyweights such as EOG Resources, Whiting, Continental Resources and Apache sliding over 30%.

The Saudis too are expected to take a hit as oil prices tank. Analysts point out that without billions of petro-dollars of oil money, “Vision 2030” — a grand project-driven initiative of Saudi Crown Prince Mohammed bin Salman (MBS) to transition the kingdom to a more sustainable economic future — is under threat.

“Multi-trillion dollar investments are needed so that these projects can both wean Saudi Arabia off its hydrocarbon addiction and also create more than 6 million jobs to employ Saudi Arabia’s youth. If the economy crashes on the back of an oil price war, then MBS may find his key projects and, by extension, his legacy under threat,” says Cyril Widdershoven, a global energy specialist in a post on the website

Despite oil prices flattening, the Russians seem to be better prepared to confront the crisis. “Russia has got the best hand in the geopolitical oil game,” says Max Keiser, programme host on Russia Today (RT). He points out that Russian production cost is around $7 a barrel. Though this cost is higher than that of Saudi Arabia, Moscow, unlike Riyadh has no external debt, a major factor shoring up its financial stability. Besides, Russia along with China has accumulated large reserves of gold, the ultimate hedge in a stock market in free fall.

According to Mr. Keiser, along with the oil price crash, the world is witnessing “part-two” of the 2008 financial meltdown, with the likelihood of the credit bubble blowing up again.

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Printable version | Jun 14, 2021 9:38:44 PM |

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