GZERO Media logo

Russia and Saudi Arabia play a crude game of chicken

Russia and Saudi Arabia play a crude game of chicken

For three years, Russia and Saudi Arabia, the world's two largest oil exporters, had a deal to prop up global crude prices by limiting production. They calculated that by producing fewer barrels, rising prices would make each barrel worth more.

Over the weekend, that deal collapsed when Russia backed out, allegedly because it decided that higher prices were also providing an unexpectedly large boost for the US oil industry, which has expanded its market share by increasing production by nearly 50 percent since the Russia-Saudi (formally, Russia-OPEC) deal began in late 2016. A lot of that increase has come from US shale oil.


Saudi Arabia, eager to show Russia that its market power is not to be ignored, slashed the price at which it sells its own oil, and moved to sharply boost production. The expected flood of new Saudi supply dropped global oil prices by more than 30 percent on Monday, the biggest overnight drop in almost three decades. Stock markets, already wobbly thanks to coronavirus, took a dive.

Now Moscow and Riyadh appear locked in a price war – a crude game of chicken that could last for weeks or even months. Oil markets are reeling because this conflict comes just as the coronavirus clobbers demand for oil as factories close, and as international shipping and air travel slow dramatically. More supply + less demand = price collapse.

Here's how the key players in this oil price drama are looking at this:

Saudi Arabia: Bring it on. If Russia won't play ball, Riyadh is happy to make them suffer lower prices, and if that also makes it unprofitable for American shale oil producers to get their stuff out of the ground, so much the better. By dint of geology, it costs the Saudis less to produce a barrel of oil than other major producers, so they can weather lower prices, at least for a while. But if this goes on too long, government revenues will suffer, and the Crown Prince will have less money to pour into his grand plan to develop the non-oil parts of the Saudi economy.

Russia: That escalated quickly. It's possible that Putin miscalculated by pulling out of the deal, not expecting such a swift and severe Saudi response. Russia can take the price hit for a good while – it has nearly $600 billion in reserves, including a $150 billion rainy day fund, and its budget is far less oil-dependent than it used to be. But a prolonged period of oil at $20-$30 per barrel would inflict some serious pain that Putin, powerful though he is, probably wants to avoid, if only to keep from running down his financial safety cushions too much.

The United States: Good for some, bad for others. On the one hand, low oil prices mean gasoline and other consumer goods get cheaper. On the other, oil companies make up a big chunk of the main stock indices, and those scrappy shale oil producers that have boosted US production in recent years are carrying a lot of corporate debt. If lower prices push them into insolvency, there is a risk of a severe financial contagion – right as the coronavirus also hits the US economy.

Other oil producing countries: This is bad. This is very bad. The price dive is frightening for major exporters like Nigeria and Mexico, which are struggling to find the money to fund big policy promises, and especially for Venezuela and Iran, which already have economic crises (as well as US sanctions) to manage.

Oil importing countries: The best thing at the worst time. If you are India or China or Turkey, all of which depend hugely on oil imports, you love lower oil prices. If only you didn't also have to worry about coronavirus, financial contagion, or wars and migrant crises.

Bottom of the oil well: Much depends on how long the Russia-Saudi fight goes on. It's possible that Saudi Arabia's big weekend move will bring Russia quickly back to the table for a new deal. If not, we could be in for a prolonged price war. That will inflict significant pain even on Saudi Arabia and Russia, but Vladimir Putin and Mohamed bin Salman are not exactly known for their willingness to back down from a fight.

The Hindu Kush Himalayan region, stretching for more than 2,000 miles, is home to the world's highest mountains. The mountain range is also home to the world's third-largest concentration of snow and ice, earning it the moniker the third pole; only the North and South Poles contain more. The glaciers of the Hindu Kush Himalayas are the main source of fresh water for around two billion people living in the region. However, by the end of this century, two-thirds of that snow and ice could be lost because of climate change. A network of data scientists and environmentalists around the world, and on the ground in the Hindu Kush Himalayas, are working to understand the extent of glacial melting in the Hindu Kush Himalayan region, its effects and what can be done to minimize its impact. To read more visit Microsoft on the Issues.

When Italy's Prime Minister Giuseppe Conte resigned Tuesday — plunging the country into chaos as it faces once-in-a-generation public health and economic crises — he became the fourteenth Italian to vacate the prime ministership in three decades. (For contrast, Germany has only had three chancellors since 1982, and France has had five presidents.)

But Conte, who had no previous political experience until he was tapped for the top job in 2018, is not so much throwing in the towel as he is taking a massive gamble that President Sergio Mattarella will again appoint him to head Conte's third coalition government in less than three years.

The recent dysfunction is unique even within the context of instability-prone Italian politics. How did Italy get here, and what might come next?

More Show less

The Democrats shocked the country by eking out a 50-50 majority in the US Senate earlier this month, securing control of the House, Senate and Executive. But do they have enough power to impose the kinds of restrictions to Big Tech that many believe are sorely needed? Renowned tech columnist Kara Swisher is not so sure. But there is one easy legislative win they could pursue early on. "I think it's very important to have privacy legislation, which we currently do not have: a 'national privacy bill.' Every other country does." Swisher's wide-ranging conversation with Ian Bremmer was part of the latest episode of GZERO World.

Ian Bremmer shares his perspective on global politics on this week's World In (More Than) 60 Seconds:

What did you think of Xi Jinping's speech at the virtual World Economic Forum?

Well, his last speech at the real World Economic Forum in Davos, I remember being there four years ago, and given that Trump had just been elected, Xi Jinping gives this big, "We want to stand up and be leaders while the Americans are doing America first." And generally speaking, was probably the most important speech of the week. People liked it. This is a pretty different environment, not so much because Trump has gone, but rather because support and belief in Xi Jinping is pretty low. I will say one thing that was generally well responded to was the call not to enter into a new Cold War. Anybody in the business community generally supports that. There's so much integration and interdependence between the US and the Chinese economies that when Xi Jinping says, "We need to find ways to continue to work together," I mean, this is the pro-globalization audience he's speaking to. They generally agree. But otherwise, the message fell pretty flat. So, the idea that China is going to be globally useful on issues of leadership, especially when it comes to anything that might threaten Beijing's sovereignty, they check global norms at the door. And a few examples of that, when Xi called for support for the rules-based international order, that's in obvious contrast with China's violation of the one country, two systems framework in Hong Kong. And they said, "Well, that's a domestic issue." Well, actually that's not what your agreement was with the British handover. And just because you're more powerful doesn't mean that norm doesn't matter anymore.

More Show less

Over the weekend, some 40,000 people in Moscow and thousands more across Russia braved subzero temperatures to turn out in the streets in support of imprisoned Kremlin critic Alexei Navalny. More than 3,000 protesters were arrested, and Navalny called on his followers to prepare for more action in the coming weeks.

But just who is Alexei Navalny, and how significant is the threat that he may pose to Vladimir Putin's stranglehold on power in Russia?

More Show less
The GZERO World Podcast with Ian Bremmer. Listen now.

GZEROMEDIA

Subscribe to GZERO Media's Newsletter: Signal