Russian and Saudi leaders must see sense for sake of the global economy
- As the world teeters on the brink of recession, an oil price war has caused stock prices already weakened by the coronavirus crisis to plunge further
As if the world doesn’t have enough trouble already with the novel coronavirus epidemic making a global recession increasingly likely, Saudi Arabia has decided to launch an oil price war.
Predictably, the oil market crashed, leading to the most significant drop in prices since the first Gulf war. That, in turn, caused stock prices around the world to plunge further, having already been routed in recent days.
Just a month or two ago, China looked like the only one in serious trouble. Now everyone is.
The immediate trigger of the price war was Russia’s refusal to join the oil producers’ cartel Opec, led by Riyadh, to lower production and maintain prices. Analysts believe the Saudis prefer to punish a wayward partner than let Russia’s defiance stand.
The Kremlin, however, was miffed by the Saudis’ “take it or leave it” attitude and did not consider itself a junior partner. In any case, the Russians arguably got what they wanted, though probably more than what they bargained for.
Vladimir Putin has been infuriated by Washington’s sanctions on Russian energy companies as well as attempts to sabotage a major gas pipeline project to Germany.
The Kremlin believes falling prices will seriously damage the American shale oil industry, which has been taking market share from Russia despite difficulties generating profits. With oil prices dipping below US$40, the US industry is indeed hurting badly, but so are Russian producers.
Riyadh has enough reserves to launch a price war, which will either force Russia back to the negotiating table; or failing that, hurt it enough to show who’s boss. But what it is doing also risks hurting the United States, its most important ally. It can hardly find a closer friend than US President Donald Trump, who depends on oil states such as Texas and North Dakota for re-election.
Saudi crown prince started an oil price war. How long can he afford it?
Saudi Arabia’s de facto ruler, Mohammed bin Salman, has a reputation for taking extreme and unpredictable policy measures. A price war, even if it looks to be benefiting no one, is in character.
At least with the Covid-19 health crisis, which has now become global, leading governments and international institutions, from the World Health Organisation to key central banks, have been forced to coordinate efforts to halt the spread and calm capital markets. With the oil price war, it’s every man for himself. Or as the Kremlin has said in a comment, every country ought to be free to set its own production levels.
Of course, falling oil prices need not be a bad thing for importing countries such as China and Japan as well as consumers. But what the markets crave is price stability. Unless the Russians and Saudis come to their senses, the world economy, already reeling from a health crisis with no end in sight, is in for an even wilder ride.
