The two countries go head to head in a battle over the price of oil.
Back in early March, when COVID-19 began prompting national response in the United States, an oil price war was brewing across the world. Saudi Arabia and Russia went head to head over oil price levels and crude production, at a dangerous time for global markets. While the previous agreement entailed limiting oil production to ramp up oil prices, Russia walked away from the negotiating table early March when Saudia Arabia sought cuts in oil production in order to encourage price stability (Bremmer, 2020). In retaliation, Saudia Arabia drastically increased oil production to pre-OPEC levels, upwards of 12 million barrels of crude oil per day, and offered steep discounts (Cook, 2020). This immediately led to a fall in crude oil prices by 30%, which Saudi Arabia anticipated would pressure Russia to resume negotiations (Bremmer, 2020).
However, Putin initially refused to budge on his stance and indicated Russia was well prepared to withstand low oil prices for the indefinite future, despite the fact that extremely low prices could push the Russian economy into a recession. Russia’s refusal to make cuts in production indicated a bold wager, one in which Russia would outlast both the Saudi Arabian and American oil industry as global oil prices plunged (Yaffa, 2020). At the same time, this oil price war hit markets just as the pandemic hit disastrous levels and forced closures around the world. As major economies witnessed shutdowns, the demand for oil steeply fell simultaneously and the supply shock felt by Russia became two-fold (Yaffa, 2020). By the end of March, Russia began to witness the grim reality of a new quarantine era ushered in by global pandemic, and Putin returned to the negotiating table with fewer financial alternatives supporting Russia.
In contrast, Saudi Arabia ended the oil fight with significant advantages and benefits. On April 9, nearly a month after the start of the oil price war, negotiations between Saudi Arabia and Russia concluded with both countries agreeing to cut oil production by almost 10 million barrels per day (D’Souza, 2020). Despite being a largely oil-dependent economy requiring around $80 per barrel to offset the public budget, Saudi Arabia has the necessary finances to withstand severe declines in the market and can potentially emerge stronger from this crisis (Bordoff, 2020). With the increased production cuts and global shutdowns, Saudi Arabia has increased its market shares in the oil industry and will bring in higher oil revenues once the market stabilizes, if it does at all.
Although these two countries took up opposite stances in the oil price wars, both nations sought to pursue their own economic interests despite the pandemic’s hold on the world economy. Saudi Arabia may have won the negotiating battle, but there is no guarantee that global markets will stabilize in the near future. Receding economies and increased budget spending from COVID-19 means that both countries will feel significant losses in revenues. The oil price war has settled for now, but the oil price problem remains at large as the pandemic wears on.
Bordoff, Jason. 2020. “The 2020 Oil Crash's Unlikely Winner: Saudi Arabia.” Foreign Policy, May 5, 2020. https://foreignpolicy.com/2020/05/05/2020-oil-crash-winner-saudi-arabia/.
Bremmer, Ian. 2020. “Why Russia and Saudi Arabia Are In a Battle Over Oil Prices.” Time, March 19, 2020. https://time.com/5806218/russia-saudi-arabia-oil/.
Cook, Steven. 2020. “Russia Is Losing the Oil War-and the Middle East.” Foreign Policy, April 10, 2020. https://foreignpolicy.com/2020/04/09/russia-saudi-arabia-oil-price-war-middle-east/.
D'Souza, Deborah. 2020. “Oil Price War Ends As OPEC+ Agrees to Record Cut.” Investopedia, April 13, 2020. https://www.investopedia.com/oil-price-war-ends-as-opec-agrees-to-record-cut-4802528.
Yaffa, Joshua. 2020. “How the Russian-Saudi Oil War Went Awry-for Putin Most of All.” The New Yorker, April 15, 2020. https://www.newyorker.com/news/dispatch/how-the-russian-saudi-oil-war-went-awry-for-putin-most-of-all.