The Oil Feud of 2020
It’s officially a grudge match and a complicated one. Two oil behemoths have squared off: Saudi Arabia versus Russia. Though not involved in the decision-making part of the feud, as the single largest oil producer, the United States factors significantly in the reason for the feud and the intended outcome.
The Organization of the Petroleum Exporting Countries (OPEC), which controls about a third of the world’s oil production, proposed reducing production to stabilize oil prices in the face of the worldwide economic slowdown caused by the COVID-19 outbreak. Russia, which is not an OPEC member, refused.
Many financial news outlets report the reason for Russia's refusal was to pressure U.S. shale oil producers. U.S. shale oil is expensive to produce and faced significant hardship as the economic slowdown caused oil prices to slide. OPEC's proposed reduction would ease pressure on U.S. producers.
Russia’s perspective was that it, as well as OPEC members who can produce oil more cheaply than the United States, could gain market share on the U.S. producers. OPEC's top producer, Saudi Arabia then decided to flood the market, driving oil prices down.
Saudi Arabia and Russia are now locked in a feud as Saudi Arabia’s actions are being taken by the energy markets as a sign that it means to punish Russia into capitulating. The actions spooked the world’s financial markets, which were already declining as economic fallout from the COVID-19 outbreak, causing some of the largest single-day drops in more than a decade. The actions come at time when supply has surged and, thanks to the economic slump, demand has decreased. Both countries rely heavily on oil production, and if the feud continues it will cause significant economic hardship on both countries—as well as the many other countries that rely on oil production, such as Iran, Venezuela, and Nigeria. U.S. producers will also be hit hard, as will producers in other countries with more diversified economies, including Canada, Norway, and Brazil.
One writer for Forbes posits that Russia is better positioned in this stand off, and that Saudi Arabia will buckle first. Should the feud continue—and Russia’s finance minister was quoted as being prepared for a prolonged conflict and that Russia could sustain lost revenue “for six to 10 years”—there could be severe implications.
The more reliant the country’s economy is on oil, the more dangerous the Saudi-Russia feud is for that country. Yahoo! finance says the implications of a long-term feud could be instability in several countries, including Iraq, Angola, and Nigeria. The U.S. shale boom could come to a crashing halt.
The 10 largest oil producers in the world, according to the U.S. Energy Information Administration, is below:
- United States: 17.94 million barrels per day
- Saudi Arabia: 12.42 million barrels per day
- Russia: 11.40 million barrels per day
- Canada: 5.38 million barrels per day
- China: 4.81 million barrels per day
- Iraq: 4.62 million barrels per day
- Iran: 4.46 million barrels per day
- United Arab Emirates: 3.79 million barrels per day
- Brazil: 3.43 million barrels per day
- Kuwait: 2.91 million barrels per day