A price war with Russia helps neither side
Why now? Why would Russia and Saudi Arabia suddenly start an oil price war at the very moment that the coronavirus crisis goes fully global?
Why would these oil exporting economies let supply rip just as demand is cratering? It doesn’t make sense.
In Foreign Policy, Jason Bordoff explains it as a game of chicken gone wrong. Last week, realising the threat to demand, the Saudis called for big cuts in production — as you’d expect. But when the Russians refused to play ball, the Saudis decided to raise the stakes by increasing production.
According to Javier Blas, chief energy correspondent at Bloomberg, the Kingdom is now pushing up its production up to a self-harming 13 million barrels a day.
The Saudis have a choice of two strategies. The easy life option is to co-operate with other countries to maximise oil prices. But if the others won’t comply, there’s the high stakes option of a price war: which though painful, hurts rival producers more.
Saudi oil is relatively easy to extract — and there’s plenty of supporting infrastructure already in place. Things aren’t so straightforward elsewhere and thus the industries there are more capital intensive — and thus more sensitive to price swings.
Especially vulnerable is the US shale industry, whose advanced fracking technology doesn’t come cheap. If those American frackers go bankrupt, the Saudis won’t mind.
So short-term losses, but long-term gains? Perhaps, but as the easy oil runs out, money will be needed to develop newer, more challenging sources around the world. Wildly fluctuating prices makes that investment all the riskier.
The Saudi industry, having the richest reserves, might be the least exposed; but, as Winston Churchill said back in 1913, “safety and certainty in oil lie in variety and variety alone.” If economically viable production becomes concentrated in ever fewer places that will only encourage importing nations to kick the oil habit sooner.
Ultimately, the greatest long-term threat to Saudi Arabia isn’t Russia or Iran or fracking, but the electric car.