Recently, we have witnessed the largest drop in oil prices due to the collapse of the deal between Russia and Saudi Arabia. It all started in early 2017 when the Saudi-Russian alliance countries (OPEC and other oil-producing countries, including Russia) began to negotiate agreements to reduce crude production, which led to positive results: the average oil price rose to 66 United States dollar per barrel by the end of 2017 and continued to rise.
At the last meeting, Saudi Arabia proposed reducing the volume of oil produced by another 1.5 million barrels by the end of 2020, a large share depended on the decision of Russia. It was assumed that amid the spread of coronavirus, such an oil price scenario would lead to an increase in income for OPEC + countries, whose economy is heavily dependent on oil exports.
However, the OPEC + alliance could not agree on an additional reduction in production, despite large concessions to Saudi Arabia, Russia refused to extend the OPEC + terms. Saudi Arabia reacted to Russia’s decision with a “price war” in the oil market, which reduced world oil prices by almost 30%. As a result, from March 9, 2020, the oil market actually returned to production levels in 2016, when the price of Brent crude oil fell below 30 US dollars per barrel. This indicator gives a clear understanding of the fact that a large excess of oil is accumulating in the world, due to the negative economic consequences of the coronavirus.
It can be argued that Saudi Arabia, which has a huge reserve in foreign exchange reserves, is more than convinced of its strength in resisting the fall in profits in the interests of achieving a long-term goal. However, what did Russia hope for when it took a fateful step, thereby putting at risk not only its own economy but also almost all countries with a commodity economy? The answer to this question is vague but is still there.
It must be understood that Russia did not refuse to lower oil prices, which is causing large-scale damage to its own economy. It most likely refused a deal in order to harm the American shale industry. Shares of small and medium-sized American shale companies are now in free fall – in recent days, the value of some of them fell by 45%. Russia’s risky game may enable it to punish the largest US shale company for its deal with Venezuela in February 2020.
Therefore, it can be assumed that the American oil shale market was at least one of the reasons why Russia abandoned the OPEC plan since the joint work to maintain high oil prices would only help the United States. Russia will now have to come up with a new scenario for the development of an event in which it will not return to cooperation with either Saudi Arabia or the United States.
On the trajectory of such a strategy by Russia, of course, the United States will have to commit to losing part of the industry in shale oil, but the United States has many other reserves and this loss will be just like a loss of tip-off.
What’s next?
It is difficult to predict what will happen next and what further impact oil will have on the global economy, given that the consequences of the new coronavirus will only exacerbate this situation. Nevertheless, there are a number of countries whose economies are the most vulnerable to withstand the game between the two large economies of raw materials. As already mentioned, in the first place, Russia’s own economy, which is already in stagnation, will suffer adverse consequences. A similar failure also awaits those who are dependent on a resource economy, in the first place, these are countries with economies in transition. Countries such as Algeria, Nigeria that have not diversified their economies will suffer the most. Social tension will noticeably put pressure on the internal stability and stability of these countries.
In addition, Russian projects on the Eurasian continent, including the Eurasian Economic Union, will suffer consequences. Price fluctuations will hit Kazakhstan’s business and economy for at least the next six months, whose main partner is Russia. Therefore, it should be noted that the Russian plan for greater power in the world oil market is doomed to utter failure.
Elvira Aidarkhanova is Assistant Professor-Researcher at Almaty Management University, Almaty, Kazakhstan.
