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.

Brazil's governors take on Bolsonaro: We've previously written about the tensions between local and national governments over coronavirus response, but few places have had it as bad as Brazil. As COVID-19 infections surged in Brazil, the country's governors quickly mobilized – often with scarce resources – to enforce citywide lockdowns. Brazil's gangs have even risen to the occasion, enforcing strict curfews to limit the virus' spread in Rio de Janeiro. But Brazil's president, Jair Bolsonaro, has mocked the seriousness of the disease and urged states to loosen quarantines in order to get the economy up and running again. "Put the people to work," he said this week, "Preserve the elderly; preserve those who have health problems. But nothing more than that." In response, governors around the country – including some of his allies – issued a joint letter to the president, begging him to listen to health experts and help states contain the virus. The governor of Sao Paulo, Brazil's economic powerhouse, has even threatened to sue the federal government if Bolsonaro continues to undermine his efforts to combat the virus' spread.

More Show less

Governments of the developed world are finally responding with due sense of urgency, individually in 3 different ways.

1st, stand health care systems up so they won't get overwhelmed (late responses). The private & public sector together, building additional ICU beds, supply capacity and production of medical equipment and surge medical personnel in the US, Canada, across Europe & the UK. Unclear if we avoid a Northern Italy scenario. A couple days ago, Dr. Fauci from the NIH said he was hopeful. Epidemiologists and critical care doctors don't feel comfortable. Not in New York, Chicago, LA, Boston, Philadelphia, New Orleans. In Europe, particularly London, Madrid, Catalonia, Barcelona, might be significantly short.

More Show less

The major outbreaks of coronavirus in China, Europe, and the United States have garnered the most Western media attention in recent weeks. Yesterday, we went behind the headlines to see how Mexico and Russia are faring. Today, we'll look at three other potential hotspots where authorities and citizens are now contending with the worst global pandemic in a century.

Start with India. For weeks, coronavirus questions hovered above that other country with a billion-plus people, a famously chaotic democracy where the central government can't simply order a Chinese-scale public lockdown with confidence that it will be respected. It's a country where 90 percent of people work off the books— without a minimum wage, a pension, a strong national healthcare system, or a way to work from home.

More Show less

In the end, it took the coronavirus to break the year-long deadlock in Israeli politics. Prime Minister Benjamin "Bibi" Netanyahu will still face corruption charges, but he has yet another new lease on political life, as he and political rival Benny Gantz cut a deal yesterday: Bibi will continue as prime minister, with Gantz serving as Speaker of the Knesset, Israel's parliament. After 18 months, Gantz will take over as prime minister, but many doubt that will ever happen.

More Show less