JEDDAH (The Thursday Times) — The global oil market may be heading toward a significant shift, with Saudi Arabia threatening to drive down oil prices to $50 per barrel if Russia and other OPEC+ members do not comply with production cuts. This aggressive stance could have profound implications for the global energy sector, particularly for Russia’s wartime economy, which relies heavily on oil revenue.
Flooding the market for compliance
Saudi Arabia, the de facto leader of the Organisation of Petroleum Exporting Countries (OPEC), has signaled its readiness to flood the market with oil if members do not commit to reducing output. Riyadh is reportedly prepared to push prices as low as $50 per barrel, a move that could severely impact OPEC+ nations that have been overproducing, notably Russia.
Saudi Arabia has been striving to maintain oil prices above $100 per barrel, pushing for production cuts across the OPEC+ alliance. However, with international crude prices hovering below $80, the kingdom’s efforts have fallen short. As a result, Saudi Arabia is expected to shift its strategy by December, increasing oil supply to penalise non-cooperative OPEC+ members.
Russian overproduction
Russia, along with Iran and Kazakhstan, has been among the OPEC+ members breaching agreed-upon production quotas. In July, Russia reportedly exceeded its daily production quota by 122,000 barrels, according to data from S&P Global Ratings. This overproduction is driven by Moscow’s urgent need to maximise oil revenues as it grapples with the financial pressures of its war in Ukraine.
With the conflict in Ukraine stretching into its third year, Russia’s defense and security expenditures have soared. Next year, these sectors are expected to account for 40% of the country’s federal budget. Oil revenue is crucial for Moscow, with gas and oil production contributing between 35% and 40% of Russia’s budget in recent years, as confirmed by the country’s finance minister.
This heavy dependence on oil revenue makes Russia vulnerable to falling crude prices. If Saudi Arabia follows through with its threat to drive prices down to $50 per barrel, Russia’s ability to finance its war efforts could be severely hampered.
Western sanctions on Russia
The West has been targeting Russia’s oil revenues in an effort to weaken its war machine. The Group of Seven (G7) imposed a $60 per barrel price cap on Russian crude as part of a two-year initiative aimed at curbing Moscow’s oil profits. While Russia has been able to bypass these caps by utilising unregistered “shadow” tankers, Saudi Arabia’s strategy could present a more formidable challenge.
If Riyadh follows through with its threat to flood the market, Russia could face a renewed oil price war with Saudi Arabia. A similar conflict occurred in 2020, when disagreements over production cuts led both nations to unleash oil supplies, driving prices down and testing which economy could endure longer in a low-price environment.
Can Russia afford a price-war with the Saudis?
A key concern for Russia in such a scenario is the depletion of its foreign exchange reserves. Since its invasion of Ukraine, Russia’s economic safety net has eroded. The country’s National Wealth Fund was nearly halved at the start of 2024, and Western sanctions have limited Russia’s ability to access foreign currencies. This leaves Moscow in a precarious position, with fewer resources to weather prolonged low oil prices.
“Unlike Saudi Arabia, Russia’s oil is not cheap to extract, making it poorly equipped to deal with low-price conditions,” said Luke Cooper, a research fellow at the London School of Economics, writing for the IPS Journal. “This drives a short-term escalatory logic for Russia’s war on Ukraine, requiring rapid battlefield successes prior to the emergence of low-price oil market conditions.”
It remains to be seen whether President Vladimir Putin will engage in an oil price war with Saudi Arabia, given his more immediate focus on the war in Ukraine. However, tensions between the two nations appear to be brewing. This week, Russia’s deputy prime minister, Alexander Novak, expressed uncertainty about whether OPEC should increase oil output at its December meeting, despite Saudi Arabia’s signals to do so.
What’s on the horizon?
If Saudi Arabia follows through with its threat, the global oil market could face significant disruptions. Russia, already grappling with Western sanctions and financial strain from its war in Ukraine, may find itself in a vulnerable position. A prolonged oil price war would not only test Russia’s economic resilience but could also have broader implications for global energy markets.
As Saudi Arabia prepares to make its move, the world will be watching closely to see how the Kremlin responds. Will Russia cut production to avoid a confrontation, or will it risk a costly price war with the world’s leading oil producer?
This evolving situation underscores the fragile balance of power within OPEC+ and highlights the economic vulnerabilities of nations that rely heavily on oil revenues. As oil prices fluctuate, the geopolitical landscape may shift, with long-term consequences for both energy markets and global political dynamics.
