- + MBS is hostile to Putin as he threatens the monarch’s power.
- + Low oil demand led to OPEC suggesting a cut in production.
- + Putin refuses the offer to harm US shale oil companies and market share.
Why is MBS hostile towards Putin?
Answer: Putin did not agree with OPEC’s decision to lower the production of oil because of national interests.
COVID-19 seems to be the root of many problems lately. Adding to its list would be the crash of oil prices last week. Yet, putting the entire blame on the pandemic would be far from the truth. But it does play a role. The outbreak has led to a decrease in consumption and hence the demand for oil. This is especially the case for the airline and the manufacturing sector as people have been restricted to fly. In fact, in February, China’s refineries required 20% less imported oil. It seems that many Asian countries are following this trend and affecting the oil exports from OPEC countries.
To tackle this problem, last week, the Saudi Arabian Prince Mohammad Bin Salman (commonly known as MBS), along with the other OPEC members, agreed to cut down the production of oil by around 1.5 million barrels per day. Owing to the currently low demand for oil, MBS wanted to cut down the production to prevent the oil prices from crashing. MBS and OPEC were just following the market trend. This point is important to remember throughout the article: high supply of a good equals fall in prices of the good.
Although Russia is not a core member of OPEC, the countries had made a deal to coordinate the oil prices through a pact known as OPEC+. Recently, a problem arose when OPEC members asked Putin to cut Russian production by around 500,000 barrels a day, which would have been the most dramatic cut amongst the countries.
Now, lowering the production would have been a rational point to consider. But Putin refused the offer in OPEC’s meeting in Vienna on the 5th and 6th of March 2020. So of course, getting aggravated, MBS did the second-most ‘rational’ thing: he decided to step up production of oil. And what has this led to? The largest stock-market sell-off since the 2008 financial crash.
MBS decided upon this measure to lower the prices steeply – the exact opposite of what he wanted to achieve in Vienna. He has announced that Saudi Arabia is going to increase production from 9.7 million barrels/day to 12.3 million barrels/day. Because of this action, the price of oil is nearing $30/barrel from the $80/barrel that Saudi needs to break even.
What does MBS want?
Answer: That nobody should threaten his position of power.
First, he wants to maintain his endangered position in Saudi. And for this, he wanted Putin to agree. Since his accession to the Saudi throne wasn’t done in the most ‘legitimate’ manner, until he is declared the King, the fear will not settle. And to maintain his power, MBS can go to great lengths. A few weeks ago, he allegedly arrested three of his relatives who were in succession to the throne. As anti-MBS movements are stirring in the country, the leader needs a win in economic policies to give himself more credibility. Furthermore, in a way, by cutting down oil prices, it helps him portray Saudi as an important geopolitical player, especially in the current times when an economic recession is nearing.
Yet, the new decision has possibly countered his efforts. The increase in production of oil is just another way of showing to Putin, as well as to the rest of the world, that his words will not be taken lightly.
It is important to remember that although the Prince might have made an impactful statement, he was previously trying to diversify the Saudi economy away from oil in line with his Saudi Vision 2030. But the mandate for the project seems to have taken a backseat for now as his move is possibly going to eat into the country’s reserves.
What does Putin want?
Answer: To harm the US oil sector’s market share.
The reason Putin was adamant about not lowering the production of oil was that this decision would enable US oil companies to gain more market share. As of now, Saudi Arabia is the largest exporter of oil followed by Russia. But the US is also part of the top 10. This obviously threatens Putin since, in many ways, oil can be associated with geopolitical strength. Also, it has been speculated that Putin could be seeking revenge on Trump for imposing sanctions on Rosneft (a Russian oil company). Rosneft was importing Venezuelan oil, and this could mean indirect support to the Maduro regime, which is under US sanctions.
Moreover, Putin had apparently gone on record to say that he would even be content with $40/barrel. This is sufficient for Russia to balance its budget but completely unsustainable for Saudi that requires $80/barrel to break even. With the current oil prices hovering around the mark, Putin does not seem as stressed as MBS would want him to be. In fact, in many ways, MBS’ sole decision is benefiting Putin in the short run for sure.
What is Putin doing?
Answer: Not much really. This is exactly what he wanted.
For now, Putin’s strategy seems to be laying low. He has already achieved what he wanted: low oil prices to affect the US shale oil market (shale oil is different from the conventional oil or crude oil produced by the OPEC members). However, one should be on the lookout for any development in the diplomatic relations between Putin and MBS. Currently, it seems that neither of the leaders is going to budge. It can be presumed that the one who would take a step to improve the relations would be the one who is worse off with the oil prices.
Consequently, another point to note is that Russian reserves are prepared for the price fall. In the past five years, Russia has accumulated reserves up to $550 billion, which will allow the country to export at around $25 to $30 per barrel for a decade. This protection is what is making Putin happy with MBS’s move and also makes it less likely that he would be largely affected by the move. In fact, the Russian finance ministry has decided to use $150 billion of their national wealth funds to support the energy budget.
Moreover, Putin also has a more secure position in office. With the Russian high court approving the amendments made to the constitution for Putin to stay in power until 2036, Putin has little to worry about accountability to the citizens. When there were talks about amending the constitution back in January, the Russian Prime Minister, Dmitry Medvedev resigned along with the entire government. But this didn’t seem to shake Putin up. Within a week’s time, Putin had formed a new government. Putin, thus, has enough power in the political system to maintain his Presidency without many hurdles. On the other hand, MBS does not have this luxury. In many ways, he still has to prove to his family and the citizens of Saudi Arabia that he is a capable leader. For this reason, MBS has a lot more at stake.
Who is winning and what about you?
Answer: In the short run, Putin is because MBS’s move is harming the US oil market.
Although MBS wanted to prove Saudi’s geopolitical strength as well as bolster his credibility, Putin still got what he wanted – at least in the short run. MBS seems to have digressed from his Saudi Vision 2030. To break-even, he required oil prices to be around $80/barrel. But his current move has plummeted the oil prices to a level that is not sustainable for the country in the long run. The project needed multi-trillion dollar investments to consequently create 6 million jobs. Moreover, his ultimate goal was to reduce the country’s reliance on oil. But for this, funding into the oil sector would need to be lowered. This step, however, is only increasing the burden on public spending.
Putin, on the other hand, is getting his way with the US oil market. Shale oil is expensive to produce. Putin is hoping that the low oil prices will not be sustainable to meet the costs and the smaller US oil firms will exit the market, reducing the market share of the US oil firms at a global level. To prevent the price of oil from falling to $20/barrels, the US firms will have to cut down production. However, Trump’s possibly the only other optimistic leader who’s tweeting “Good for the consumer, gasoline prices coming down!” hoping that the citizens will consume more. But this trend is unlikely to take off considering the economic and political situation.
A major problem is that MBS is not listening to the global demand for oil and the oil prices are going to worsen over time. But how will you be affected? For many people concerned, this could possibly accelerate the economic crisis that has already been exacerbated due to the COVID-19 outbreak. The change in oil prices could also lower the prices of airline tickets, which would have been a good incentive for consumers to travel more. However, with the COVID-19 outbreak, tourism has fallen so this will neither benefit the airline industry nor the consumer. Moreover, investors who own stock in the oil or airline industry will have to be exceptionally careful now as price fluctuations persist. Saudi’s neighbouring countries that are already feeling the economic hardships as well as heavily reliant on oil are bound to suffer a great deal. So now, all we can do is wait and see which leader extends his hand for cooperation.